Anyone who has watched a horror film in the last 30 years is familiar with the concept of a zombie, that is a person reanimated after being dead (and according to modern horror lore, hungering for brains to sustain their new existence).
In the corporate context, a zombie corporation is an enterprise that still generates cash flow that stays afloat by taking on new debt.
According to Goldman Sachs, “Zombie companies are typically defined as firms that haven’t produced enough profit to service their debts (also known as an interest coverage ratio below one) for three straight years. Based on that definition, some 13% of companies based in the U.S. could be considered examples of the living dead.”
Such companies can subsist for years when interest rates are low. However, as interest rates have increased, many of zombie corporations have failed or filed for bankruptcy protection.
In fact, the Federal Reserve commissioned a study evaluating how many U.S. firms were zombie companies and published the results on July 30, 2021.
The Federal Reserve concluded, “Altogether, the evidence in this and the previous sections suggests that U.S. banks not only have limited credit exposure to zombie firms, but they also lend to zombie firms at terms suggesting an elevated assessment of credit risk.”