(1 September 2022 – Global) As interest rates normalise, many “zombie” companies kept solvent by perpetually cheap money could finally succumb, resulting in a contagion risk of corporate defaults the likes of which has not been seen since the 1991 recession in Australia and during the 2007 Global Financial Crisis in the United States.
Coolabah Capital Investment’s “Quantitative Zombie Detection Models” reported in livewire applies a standard definition for a zombie company satisfying two tests – they have existed for more than ten years, and they have an interest coverage ratio (ICR) of less than 1 for 3 years in a row. Using this definition, Coolabah finds that over one in ten ASX companies are zombies (13 percent), which is actually slightly higher than the number of US zombie enterprises, which is just under ten percent of all listed firms across the NYSE and NASDAQ exchanges.
In Australia, an incredible one in three ASX corporates would be classified as zombies as judged by their ability to produce sufficient EBIT to cover their interest repayments (34 percent).
“This has implications for markets. As interest rates continue to climb, we are likely to see the first interest rate-led default cycle in Australia since 1991. In the early 1990s, ANZ and Westpac almost went bankrupt because of their loan exposures to the commercial property sector” commented Coolabah Capital Investment Founder & CIO Christopher Joye.
“Since the 1991 recession, we have also seen a big increase in “non-bank” lenders, many of whom provide finance to zombies, and don't have the risk management experience of lending during the 1991 recession, the tech-wreck, or even the GFC”