Edward Altman and Wei Wang Talk Zombie Companies With Reorg’s Gaurav Sharma
Oct 9, 2023
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Renowned bankruptcy guru Edward Altman and esteemed finance professor Wei Wang discuss the rise of zombie companies worldwide, exploring factors such as lenient monetary policies and global corporate bond markets. They also analyze the effects of bankruptcy law reforms on zombie firms and explore the negative effects of subsidized credit on resource allocation. In addition, the podcast provides updates on various companies and their financial situations, including Rite Aid, Lumen Technologies, and Sunlight Financial.
The rise of zombie companies can be attributed to factors such as lenient monetary policies and the development of global corporate bond markets.
The prevalence of zombie firms has increased globally, with the United States having a larger fraction compared to other countries.
Deep dives
Definition of Zombie Firms and Factors Behind Their Existence
Zombie firms are economically inefficient, insolvent companies that continue to operate over long periods of time. The definition of a zombie firm requires both a cash flow to interest ratio of less than one over three years and a Z-score indicating high distress over the same period. Factors contributing to the rise of zombie companies include economic growth, industry composition, lenient monetary policies, and the development of global corporate bond markets.
Increase in Zombie Firms Globally
The prevalence of zombie firms has grown globally, with the fraction of zombie firms in the 20 largest economies rising from 1.5% in the early 1990s to over 7% in recent years. When considering interest coverage alone, the fraction stands at 20% in these economies. The United States has a larger fraction of zombie firms compared to other countries, with almost 10% of US-listed firms classified as zombies. However, the ratio has declined slightly in recent years.
Size and Economic Cycle Impact on Zombie Firms
The size of a company is an important indicator for the prevalence of zombie firms. Small firms, particularly those with less than $50 million in sales, have a higher percentage of zombie firms compared to larger companies. Economic cycles, such as large recessions, have a significant impact on the increase in zombie firms. The combination of recessionary periods and signs of distress prior to the recession often leads to companies qualifying as zombies.
Impact of Corporate Debt Markets and Bankruptcy Laws on Zombie Firms
The growth of corporate debt markets, including high yield bonds and leverage loans, has contributed to the existence of zombie firms. Companies with lower credit ratings, such as Triple C-rated firms, have a higher percentage of zombie firms. The existence of highly sophisticated leverage finance markets, while beneficial for economic growth, has also increased the number of zombies. Bankruptcy law reforms, particularly those that strengthen credit rights, have been effective in reducing the prevalence of zombie firms by promoting restructuring and liquidation.
Renowned bankruptcy guru and NYU Professor Ed Altman and esteemed Queens University finance professor Wei Wang discuss with Reorg’s Gaurav Sharma their research on the worldwide surge in zombie companies. Ed and Wei discuss the various factors behind the phenomenon, including lenient monetary policies, and the development of global corporate bond markets.
And, as always, we bring you our weekly summary of interesting developments in the restructuring world as well as a preview of what’s on the docket for next week.
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#leveragedfinance #highyield #restructuring #performingcredit #distresseddebt #debtrestructuring #leveragedloans
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