Key findings from an AP investigation on the emergence of debt-ridden "zombie" businesses throughout the globe

According to an Associated Press research, there is a rise in "zombie" businesses throughout the world—nearly 7,000 of them, with 2,000 of them in the US—that are heavily indebted and unable to make interest payments.

An investigation by the Associated Press shows that the number of "zombie" firms—nearly 7,000 globally, including 2,000 in the US—is on the increase. These companies are having trouble paying off their debt, which might trigger financial catastrophes.

According to an Associated Press research, there are now roughly 7,000 publicly listed "zombie" firms worldwide, including 2,000 in the US. These companies are so indebted that they are unable to pay back even the interest on their debts.

Due dates on hundreds of billions of dollars in loans that they may not be able to repay are quickly approaching for many of them, and they might soon face their day of reckoning.

Robert Spivey, managing director of Valens Securities, predicted that the weakest zombies will be destroyed.

The following are the main conclusions from the AP's analysis:

Companies that have not generated enough revenue from their activities over the last three years to cover even the interest on their debts are usually referred to as zombies. Their numbers have increased as a result of years of low interest rates that enabled businesses to accumulate large amounts of inexpensive debt before being severely curtailed by persistent inflation that drove borrowing costs to all-time highs.

According to AP's analysis, these companies—which operate Carnival Cruise Line, JetBlue Airways, Wayfair, Peloton, Italy's Telecom Italia, and British soccer powerhouse Manchester United—have seen their ranks in raw numbers soar by at least a third over the past ten years in Australia, Canada, Japan, South Korea, the United Kingdom, and the United States.

Higher interest rates are now harming zombies because many of them lack substantial cash reserves and because the interest they pay on many of their loans is variable rather than fixed.

The potential harm if they are forced to declare bankruptcy or shut their doors permanently has increased along with the number of zombies. In a dozen nations, the companies included in AP's investigation employ at least 130 million people.

At a 14-year high, the number of American company bankruptcies is already more than predicted during a recession rather than an upswing. Recently, corporate bankruptcies in Canada, the United Kingdom, France, and Spain have reached record highs spanning over a decade or more.

Hundreds of zombies refinanced their loans over the first three months of this year as lenders opened their wallets expecting the Federal Reserve to begin tapering in March. In the last half of a year, the stocks of over 1,000 zombies analyzed by AP have increased by 20% or more because to this fresh funding.

However, a lot of people refinanced but there's not much time left.

Zombies will have to repay $1.1 trillion in loans during the summer and into September, when many investors now anticipate the first and only Fed reduction this year, or two-thirds of the entire amount due by the end of the year, according to AP's estimate.

If central banks decrease interest rates immediately, some analysts believe zombies might be spared layoffs, business unit sales, or collapse; but, sporadic defaults and bankruptcies could still have a negative impact on the economy.

Wall Street, for its part, is not in a panic. Some zombie stocks and associated "junk bonds," or loans that rating agencies believe are most likely to fail, have attracted the attention of investors. Zombies may be able to raise money in the short term as a result, but investors who buy these instruments and drive up their values risk suffering significant losses in the long run.

According to Penn Mutual Asset Management fund manager George Cipolloni, "we're going to see more bankruptcies if rates stay at this level in the near future." "They won't have the money when it's due at some time. The game is done.

Credit rating agencies and economists have been warning for years about the risks associated with corporations taking on excessive debt when interest rates dropped. However, the warnings gained significant traction when central banks worldwide slashed benchmark rates to almost zero during the global financial crisis of 2009 and again during the 2020–21 pandemic.

It was a massive, unheard-of experiment intended to ignite a borrowing frenzy that might prevent a global slump. Additionally, because of the low interest rates, it encouraged massive borrowing by consumers, governments, and larger, stronger businesses, creating what some analysts referred to as a "credit bubble" that extended well beyond zombies.

What made many zombies unique was that they used their debt for things like buying back their own shares instead than using it for hiring, expanding, or investing in technology.

Through these so-called repurchases, firms are able to compensate for new shares generated for top executives in order to increase their compensation packages by "retiring," or taking the shares off the market. Yet, an excessive number of stock buybacks might deplete a company's liquidity.

That was the situation with Bed Bath & Beyond's zombie disaster. The retail firm, which once had 1,500 locations, struggled for years until it decided to spend $7 billion on buybacks over the course of ten years due to severe indebtedness. According to executive data firm Equilar, only three senior executives' salaries exceeded $140 million, despite the company's shares plummeting from $80 to nothing. As the business descended into filing for bankruptcy last year, tens of thousands of employees throughout all 50 states lost their jobs.