As the chills of Halloween hover around the corner, it’s the perfect time to discuss an increasingly used term in the financial world – ‘zombie company’.
We are all familiar with the glassy-end stare of a zombie – creatures trapped between life and death, controlled by an insatiable appetite. The definition of a zombie company isn’t much different. It’s a business that makes just enough income to pay its operating expenses and service its debt. It has no way to actually pay off its debt. Without the ability to continually refinance its debt, it will cease to exist.
Zombies have an insatiable appetite for brains…zombie companies have an insatiable appetite for financing.
Zombie companies have no chance to prosper, but they refuse to collapse. (Just like a real zombie! If there were real zombies, that is…).
I know what you’re saying right now – cool analogy, but so what?
Well, if you’ve ever wanted to watch zombies return to the grave, the next couple of years will be a “must see”. The rise in interest rates combined with stricter underwriting criteria will mean that zombie companies will no longer have the ability to refinance their debt. We all know the drill – if you can’t pay, you can’t play.
No one likes to see a business fail. But the ability to redeploy assets (i.e., capital) from nonviable businesses to healthier, more innovative firms means the economy continues to grow over the long term. And that’s a good thing.
But life is interesting. Sometimes zombie companies defy the odds and transform, shedding their zombie skins and rising from the grave to become flourishing, productive entities that contribute to economic growth and development.
And that’s also a good thing! So, as Halloween approaches, enjoy the festivities and remember – keep an eye out for those zombies! Happy Halloween!