Theres a Growing Wave of Zombie Companies in Europe. The EU Recovery Fund Could Be a Solution, Bank of America says. – Barron’s

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There is a growing wave of so-called zombie companies in Europe, according to an analysis from Bank of America.

There has never been a quarter with a bigger spike in the percentage of Stoxx Europe 600 companies that have interest coverage ratio below 1, Bank of Americas credit analysts say. They define interest coverage as the ratio of earnings before interest and tax to interest expense, and find just over 10% of nonfinancials meet that criteria.

So far, that hasnt hurt investors in European credit. With 65 interest rate cuts around the world, 3050 out of 3200 investment-grade bonds traded tighter in the second quarter. European Triple-C bonds have seen a V-shaped recovery in total return terms, they add.

While Bank of America isnt bearish on European credit, they say the third quarter wont be so easy. Liquidity can only go so far in keeping markets supported, and measures to improve solvency will be needed.

If governments undertake bold and effective fiscal policy then they can shield the private sector from an unmanageable increase in debt, the analysts say.

That could come from the 300 billion that could potentially be made available by the Solvency Support Instrument provision of the European Unions proposed recovery fund.

Bank of America says the average net debt-to-equity ratio of European investment grade nonfinancials, that are levered by at least two times, could fall to 1.2 from 2.2 if this equity was injected.

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Theres a Growing Wave of Zombie Companies in Europe. The EU Recovery Fund Could Be a Solution, Bank of America says. - Barron's

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