Corporate zombies walking the globe - Is this a problem?

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.

The zombies as a percentage of firms by sector shows there is a high concentration in the commodity sectors especially precious and industrial metals with well over 40% of firms meeting the criteria of corporate zombies. Precious metal firms have improved with the rise in gold prices, but this can change quickly if there is a price fall. This sector concentration also explain why countries like Canada have a high percentage of zombies. Overall, the problem firms are not as widespread across economies. 

Throwing more money at these corporate zombies, either public or private, is problematic. Many will fail and those that survive will still be inefficient. These firms employ workers but there is a drain on productivity which stands in the way for new more efficient companies. Zombies may be value plays but in a low interest rate world there is no way to create value from lowering debt costs and history suggests that even if these firms survive, they limb along with below median sector behavior.