The past decade has seen record levels of fiscal stimulus & quantitative easing coupled with near-zero interest rates that have multiplied over the pandemic era.

Our Associate, Corporate Finance, Casey Portors discusses rising interest rates and the definition of ‘Zombie Companies’.

Read the Conversation:

I've had a few discussions recently and I've realized that myself and very many other people who follow and are involved in the financial markets haven't been around for long enough to experience this period of rising interest rates that are happening around the world. And even more than that, The fact that the past decade has seen record levels of fiscal stimulus and quantitative easing coupled with near zero interest rates that have definitely multiplied over the pandemic era.

And when you put all of that together, it becomes very obvious that these sorts of conditions have spawned the rise of what we call zombie companies. So there isn't a clear cut definition of a zombie company, but they're broadly described as a company which has existed for over ten years and has an interest coverage ratio of less than one and has had that for more than three years.

So in other words, they're very highly leveraged and they don't generate sufficient profit to service their net interest expenses. Under this definition, around 13 percent of all ASX companies are zombies. And if we include companies that haven't been around for as long, the estimate for ASX companies is as high as 35%.

And it's a very similar story in the U. S. and Europe. In our new reality where central banks are expected to continue raising rates for at least the foreseeable future, It does seem really likely that we'll see a wave of defaults led by these sorts of companies. And when you add in the effects of growth slowing around the world, and the fact that supply chain disruptions seem to be here to stay, it's almost certain that these are the sort of companies that are going to be succumbing to these conditions.

For those who are on the lookout for value and equities in this sort of market, it's crucial, more than ever, to screen out those companies that look to be the most exposed, and rely on fundamentals. For anyone who'd like to learn more, feel free to reach out to myself through our channels, or reach out to any one of our advisors.