A specter of the «lost decade» of 1990s Japan comes to the mainland as the property market downturn prompts the number of highly indebted companies to rise by more than a quarter. But is it as bad as it seems?
At first glance, you would think that a zombie company is a rare appearance in the economic wild – something that only rears its head in extremely straitened economic circumstances such as post-1980s bubble Japan.
But a recent report by international management consultant Kearney says otherwise. Worldwide, the number of companies that didn’t make enough profit last year to pay off their debt commitments accounted for 5.8 percent of all publicly traded businesses.
Zombie Apocalypse?
Moreover, their numbers have risen 8.8 percent annually since 2010, a figure that should’ be enough to scare the most ardent of investors to drop fixed income and equities in a flash and instead seek succor in the safe havens of cash, precious metals – or crypto.
But we are getting slightly ahead of ourselves. «Zombies are worthwhile investments, at least in the short term,» Kearney maintained, adding that the value created in the first deal after a zombie’s debt has been restructured, or refinanced, is more than double the market average.
No Lasting Effect
According to them, total shareholder returns for zombies are 14.6 percent in that first year against the average market return of 5.6 percent. «That value even outpaces MCSI global equity market performance. But the good times don’t last,» Kearney indicates, adding that declines surpass market averages by a long shot three years after a deal.
We would surmise that much of that behavior mimics that of Japan in the early part of the lost decade when growth would come in fits and starts, then sputter, only to subsequently flat line for what seemed like years on end.
Strong Regional Growth
Still, short, medium, or long term, the zombie company appears to be having its day in the sun right here on our doorstep.
«The Asia Pacific region had the most significant upsurge of zombies, including a 10.4 percent increase in Asia and a 13.6 percent uptick in Australia,» the consultant reported.
Strong Factor
It justified that by saying the increase in the latter was due to a pronounced dip in GDP growth, which was also potentially the factor behind the overall regional increase in zombies given that GDP growth remained buoyant elsewhere.
But there was one significant caveat – China. The mainland was «especially hard hit» by the real estate crisis, which was first mentioned in the consultant’s 2021 zombie report. That trend continued as the number of zombies rose more than 27.2 percent in 2023, or well more than a quarter.
Against the Grain
Nevertheless, the proportion of zombie companies in China is still just 3.4 percent, far below the global average of 5.8 percent and that last figure goes against the grain of those who believe, finews.asia included, that China might be at a tipping point of its own lost decade.
Another thing that seemingly counts in its favor is the country’s relatively low interest rates compared to that of other major economies, as the Statista website shows.
Clear Worries
That differs from experience elsewhere, where a post-pandemic ratcheting up of inflation in many countries has created more zombies in the real estate than any other sector, a development that is not likely to be as sharp in China.
It is, however, something that the rest of the world clearly must worry about as Kearney believes the impact would be «drastic» if all companies had to refinance debt at current interest rate levels.
Future Opportunities
Their stress tests indicate that the number of zombies globally would double, turning almost 8 percent of all companies out there into zombies, up from the aforementioned 5.8 percent.
However, this is also an area that could pose interesting possibilities for ultra-high net worth clients of mainline wealth managers with significant investment banking franchises, given the consultant said interested investors were «few and far between».
Do the Research
Kearney does have a few words of caution, saying that anyone willing to participate in a deal should be prepared to do their research, look for bargains, and, importantly, prepare to cash out at the one-year mark.
«Zombies don’t add value for long, so come prepared,» they maintain.