Corporate spreads are tight. High yield spreads are tight. Non-financial firms are doing well as measured by the perceived corporate bond risk, but that does not change the fact that we have increased the number of zombie firms around the globe and many firms are not making money. A recent study from the BIS "Corporate Zombies: Anatomy and Life Cycle" provides both good and bad news. Well, mostly bad news on the life cycle of corporate zombies.
Covering 14 advanced economies for a period of close to 40 years, the authors find that the number of zombie firms has risen by a factor of 4 from around 4% to 15% in 2017. This was even before the current pandemic.
A corporate zombie is as unprofitable firm with low stock valuations that does not have an interest rate coverage as measured by EBIT above 1. Market value to replacement cost, Tobin's q, is below the median for its industry sector. The firms are smaller, less productive, more levered and have less investment in physical or intangible assets.
There is a 1/4 chance of zombies disappearing from the market and about a 60% chance of leaving zombie status. The good news is that you can reverse the curse of being a zombie, but these firms will still underperform peers and face a strong chance of relapse.
The problem of corporate zombies is global. Some countries show large variation in the percentage of zombies while other feature a strong upward trend.
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