US Zombie Companies Are Now $2.6 Trillion in Debt. What Does That Mean for Investors? – Motley Fool

So-called ''zombie companies,'' firms that are in debt to the point of needing bailouts to survive, have been rising steadily in number since the '90s -- steadily that is until coronavirus pandemic-induced lockdowns took place. Those events caused the number of zombies to skyrocket, creating more than 600 zombie corporations (out of 3,000 large companies) with $2.6 trillion in debt. These firms are just limping along, harming the American economy as they go.

In two words: The Fed. Without the Federal Reserve purchasing corporate bonds and allowing these failing companies access to credit, these faltering firms would likely have failed. The Fed, by keeping unproductive and ailing corporations alive and not allowing a natural death to take place, has created a dangerous and gruesome mess -- one so pervasive that U.S. economic growth could be delayed for years.

Zombie companies, you see, aren't earning the capital needed to invest in and build their businesses, which helps the country; rather they're a huge drain on America. Note that the United States has fostered zombie companies for the past decade, but the pandemic and the lockdowns greatly worsened the problem.

More than 600 U.S. companies are zombies, defined as not making enough money to pay the interest on the debt they've accumulated. You've heard of all of them: Macy's, the four major airlines (Delta, United, American, and Southwest), Carnival, Exxon Mobil, and Marriott International, to name a few.

Some companies, such as hotels and restaurants, are not dead, merely wounded. And wounded companies should come back -- so long as they weren't killed. Post-pandemic consumerism, however, will probably look different from pre-pandemic spending. While many corporations won't die, they might need to do a major pivot to survive.

It's important for investors to understand which companies are zombies and which ones are likely to die versus those with a good chance of survival. Keep in mind that once a company has been a zombie, the weakened position makes it less likely to experience a full recovery. In fact, according to research from the Bank for International Settlements, companies that became zombies once are three times more likely to become zombies again.

What impact do zombie companies have for the commercial real estate investor? Zombie stock could be a good short-term investment but probably not a great long-term one. Unless you're confident a company became a zombie only temporarily due to the coronavirus, it's best to keep a sharp eye on zombies and former zombies.

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US Zombie Companies Are Now $2.6 Trillion in Debt. What Does That Mean for Investors? - Motley Fool