Zombie company
A zombie company or a zombie company is a highly indebted companies , which due to its un profitable business operation is unable to interest rates of recorded loans to pay. Note 1To ensure the short-term survival of a zombie company, new loans are often taken out, with which the interest and possibly also repayments of existing loans are paid. A generally low level of interest rates promotes the survival of zombie companies or prevents market shake-up to a normal extent.
Creation of zombie companies
Many companies use high levels of debt to make investments that are difficult to do with equity . The required external capital can be obtained, for example, in the form of loans that are granted by banks or other institutions ( non-banks ). In the case of a loan, the borrowed amount usually has to be repaid ( repayment ) as well as a loan fee for making the loan available (usually as interest ).
It can happen, however, that the investment made does not pay for itself because the changed market situation does not lead to sales as expected. Another possibility is, for example, that the costs increase unexpectedly. All of these events can cause a business to have insufficient earnings to pay principal and interest.
The company can thus find itself in a situation in which, on the one hand, it has high costs due to the interest burden on the loans taken out, but on the other hand, it has falling or low income. If a respective company does not change anything in its business operations in such a situation, there is a risk of bankruptcy in the medium term .
An attempt is made to avert insolvency by taking out new loans, with the newly taken out loans being used to pay interest and, in some cases, the repayment of old, existing loans. A falling or already very low interest rate level, which is often permanently prescribed by a low interest rate policy by central banks, makes it a cheap alternative for such a company to postpone the impending bankruptcy by taking out more and more new loans and instead of postponing it into the future make fundamental changes in the company or actually file for bankruptcy.
The name “zombie” company comes from the fact that the company is actually already insolvent (“dead”), similar to a zombie , but is artificially kept alive by new loans with low interest rates. Thus, it is about "undead" companies that like most zombies cannot stay alive independently, but neither "die" or go bankrupt.
In theory, any financially solid company can become a zombie company. This can happen both through internal events (for example wrong internal decisions) and through external events such as crises.
Effects on macroeconomic productivity
The Organization for Economic Cooperation and Development (OECD) warns of the risks posed by zombie companies. In a working paper, the authors conclude that zombie companies clog the market and use or waste resources that could otherwise be used by productive companies:
“[…] The results show that the prevalence of and resources sunk in zombie firms have risen since mid-2000s and that the increasing survival of these low productivity firms at the margins of exit congests markets and constrains the growth of more productive firms. [...] ”
“[…] The results show that the proliferation of zombie companies and the resources they use have increased since the mid-2000s and that the increasing survival of these low-productivity companies on the fringes of exiting is clogging markets as well limits the growth of more productive companies. [...] "
The resources tied up by zombie companies include capital, labor and market shares that would be used by more productive competitors at normal interest rates, i.e. under fair competitive conditions.
Rescuing zombie companies
The continued existence of a zombie company can often only be guaranteed through massive changes in the business activities of the respective company, for example through restructuring or outsourcing . If such changes are not possible or if they are not implemented, bankruptcy threatens. In order to protect companies that are considered to be systemically relevant (English buzzword too big to fail ) from insolvency with sometimes extremely serious consequences for the market and the population, rescue operations are often carried out , i.e. liability is assumed by third parties.
In connection with the rescue operations for banks since the financial crisis from 2007 as well as the euro crisis , the term zombie bank also gained in importance.
Consequences of a rate hike
If one or more central banks withdraw from the ultra-loose monetary policy (see also quantitative easing ), the bond purchase programs will presumably be slowly scaled back and finally stopped altogether and the key interest rates slowly increased.
As interest rates rise, it will become increasingly difficult for zombie companies to bear the interest burden on their loans. However, the rise in key interest rates does not have a negative impact on companies immediately after the rise, as there are usually fixed interest periods of several years. It only becomes problematic at the end of the fixed interest period when the interest rates for the new refinancing loans are significantly higher than the interest rates for the old refinancing loans and the zombie company is not able to bear the difference.
Such a process threatens a wave of bankruptcies of zombie companies because many of these companies will no longer be able to pay the higher interest rates. The affected companies are threatened with a massive shakeout.
Number of zombie companies and situation worldwide
Before the times of quantitative easing and very low interest rates, the bankruptcy of the most unproductive firms was part of the normal self-cleaning process of the economy (market shakeout). This automatic process of cleaning up the markets for the “worst” companies was severely restricted by the anti-crisis policies of the central banks for years.
A credit strategist at a major US bank describes the situation of many companies as follows: "The monetary support in the past five years [2012-2017] has helped less profitable companies to prevent the impending bankruptcy."
According to the OECD, a comparatively simple means of clearing up the market is to reform bankruptcy rules in many countries. In the European countries on the Mediterranean in particular, the hurdles are high before an actually insolvent company ultimately leaves the market through insolvency.
As early as 2014, a large number of zombie companies in China threatened to collapse under their debt.
Situation in Europe
In a study from 2017, Bank of America (BoA) came to the conclusion that around nine percent of the 600 largest listed companies in Europe are zombie companies .
In a report, the OECD comes to the conclusion that there are relatively many zombie companies compared to other European countries, especially in southern Europe. The OECD considers a market shakeout of the unproductive companies to be necessary in order to strengthen the productivity and competitiveness of Europe again.
According to information from the Deutsche Bundesbank from December 2017, the proportion of zombie companies is low in an international comparison and does not pose a problem.
| Country | Share (2007) | Share (2013) |
|---|---|---|
| Greece | no information | 28 percent |
| Italy | 7 percent | 19 percent |
| Spain | 8 percent | 16 percent |
| Germany | no information | 12 percent |
Demarcation
As a rule, young companies that are not yet profitable after being set up and where the interest burden also exceeds the profits are not among the zombie companies.
See also
Web links
- The zombies ask for a duel , Gerald Braunberger, Frankfurter Allgemeine Zeitung, January 17, 2018
Footnotes
Individual evidence
- ↑ Upside down (financial) world: How the ECB promotes zombie companies. In: wiwo.de. August 8, 2017, accessed December 31, 2017 .
- ↑ a b c d e f ECB: Zombie companies prevent higher interest rates. In: welt.de. July 31, 2017, accessed December 31, 2017 .
- ↑ Zombie companies threaten the economy. In: sueddeutsche.de. August 5, 2017, accessed December 31, 2017 .
- ↑ The "Draghi Crash" is only a matter of time. In: nzz.ch. August 9, 2017, accessed December 31, 2017 .
- ↑ a b c d e The Walking Dead? Zombie Firms and Productivity Performance in OECD Countries. In: oecd.org. Organization for Economic Co-operation and Development (OECD), January 10, 2017, accessed December 31, 2017 .
- ↑ Weak banks feed zombie companies. In: n-tv.de. November 28, 2017, accessed December 31, 2017 .
- ^ Psycho party on the stock markets. In: teleboerse.de. August 1, 2017, accessed December 31, 2017 .
- ↑ a b c OECD report: Zombie companies threaten the boom. In: spiegel.de. December 9, 2017, accessed December 31, 2017 .
- ↑ Credit bubble: Zombie companies in China are threatened with bankruptcy. In: handelsblatt.com. April 10, 2014, accessed December 31, 2017 .
- ↑ a b Zombieization of the economy: In Europe there are too many dead companies. In: faz.net. December 8, 2017, accessed December 31, 2017 .
- ↑ Zombie companies are not a German problem. In: faz.net. December 18, 2017, accessed February 3, 2018 .