EDITOR NOTE: There’s something ironic about the “zombie apocalypse” becoming such a prominent idea in popular culture long before the current pandemic. Although the coronavirus brought neither zombies nor existential apocalypse, what we are seeing is a horde of companies that are neither alive nor dead–zombie companies, that are responsible for around 2.2 Million jobs in the US. What’s a zombie company? It’s a heavily indebted business whose debt far exceeds its revenue. Thanks to the government, now they’re able to borrow even more money at a cheaper cost. While it allows zombie companies to continue operating, it also allows them to eat away at the stability of the nation’s attempted economic recovery.

 

Heavily indebted “zombie” companies happen to control nearly 2.2 million jobs at a time when the U.S. is in a deep employment crisis.

 

The companies occupy a large swath of American industry, from big conglomerates to the restaurants and bars that have suffered so much during the coronavirus pandemic and the associated social distancing measures that have torn a hole through the U.S. economy. They’re generally designated as companies that continue to operate even without the revenue stream to pay off their debts.

 

At the sector level, they range from the 233,000 jobs in industrial to conglomerates to 738 in the insurance business, according to data compiled by Arbor Data Science. The unemployment rate has surged to 14.7% during the coronavirus crisis as more than 23 million Americans were out of work as of the end of April.

 

Some of the biggest names have actually found it easier to raise more debt during the present crisis, as a Federal Reserve intervention has breathed new life into the corporate bond market. Their stock prices have also rebounded aggressively.

 

However, that’s also generated some worry in the market that the current rally could be overheating.

 

“The outperformance of zombie companies in the last month and half or so can be directly tied to the highly speculative nature of the rally in terms of where the buying pressure is,” said Liz Ann Sonders, chief investment strategist at Charles Schwab.

 

Specifically, Sonders said there are heavy bullish bets coming from small-volume options traders, day traders and even those who normally dabble in sports gambling.

 

“That ties into the surge in zombies,” she said. “That’s where the momentum has been. It sort of feeds on itself in a very, very speculative part of the market.”

 

U.S. companies have taken on record amounts of debt over the past two months amid a welcoming climate that has come through the Feds’ commitment to keeping the corporate bond market running. The central bank has only begun nibbling at the sector, buying ETFs on the secondary market that track, among other issues, so-called fallen angels that fell from the low parts of investment grade before the crisis to junk now.

 

Since the Fed made its late-March pledge to buy corporate debt, the SPDR Bloomberg Barclays High Yield Bond ETF has risen more than 18%.

 

“The zombie companies are those firms that are able to borrow in effect cheaper than they should given their revenue, and they’re able to stay in business,” said Steve Blitz, chief U.S. economist at TS Lombard. However, he adds that “the Fed is backstopping the liquidity in the corporate market, it’s not backstopping the credit in the corporate market, and there’s a difference.”

 

The distinction is that the central bank is looking to keep the markets flowing, but it is not looking to be a major player and its programs are aimed at market functioning and not picking winners and losers.

 

“What they’re talking about is not so much zombie firms but firms that would otherwise just shut down,” Blitz said. The companies “can say, look, we can borrow money over the next few years. These aren’t grants.”

 

Originally posted on GSIExchange

 

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