Do you know what zombie companies are?

 

Zombie companies are companies whose economic performance is insufficient to cover their financial costs. This means that your creditworthiness is used almost exclusively to pay off debt and interest, and loans must be refinanced over and over again to maintain creditworthiness.

What are zombie companies?

The definition of the term is always the same, because it was born in the union between popular culture and the economy. The standard way of referring to these companies is fragile companies.

However, the idea behind this concept is the same; the company can hardly survive due to the enormous burden of its financial costs on economic returns. This is the fundamental aspect that distinguishes these companies from other companies that may be in a state of “vulnerability”: for example, it is not the same not to obtain benefits as the contribution of benefits that will be considered destined to the payment of interests and loans.

Over time, the situation of these companies will deteriorate , it is no longer just a loan repayment problem and it is not enough to pay the interest on the debt refinancing. Companies in this critical situation generally present a very high risk to the economy, because if many of them fail, which inevitably will at some point, many creditors of their debts will go bankrupt. It will be affected at the same time.

This happened in 2008: the failure to meet many payment commitments turned the American housing crisis into a global financial crisis. The existence of a large percentage of these companies usually occurs in cases of overproduction and inefficiency, because they cannot make the investments profitable.

While companies can maintain their solvency by regularly resorting to loans and refinancing, their activities have an impact on the entire economy. Although the consequences of this are varied, we can mention the three most important:

• First, the zombie companies operate “at cost ” and operate in their respective markets while minimizing prices. In this way, they force their competitors to do the same, greatly reducing the revenue of the entire industry.
• In connection with the above, they discourage other companies that want to enter the market where zombie companies participate.
• They accumulated financial capital that could be injected into other activities, eventually proved solvent and declared bankrupt, and finally wiped out this capital.