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Twelve per cent of all businesses worldwide are now "zombie companies", which means that, according to the Bank of International Settlements, they can hardly afford to interest their debt. Sixteen percent of US corporations are zoombies. During the early 90s the zoomie ratio was only 2%. However, low interest and investors' demands for leveraged loans have generated a vast financial environment that keeps abreast of those miserable businesses that should have gone up the garden wall years ago.
An $1.6 trillion loan leverage is a trillion dollar exposure to overall fiscal instability, according to former Fed chairman Janet Yellen. ONDON - 12% of all enterprises worldwide are, according to the Bank for International Settlements, "zombie companies", which means that their earnings are lower than the interest paid on their debt, and they are more than 10 years old.
If a business cannot earn enough cash to even pay the interest on its loans (let alone the capital on which they are based), it is on the verge of going bankrupt. However, like the zombie, businesses can stumble for years as long as low credit standard bankers expand their credit. Over 16% of all US businesses are a zombie.
According to BIS veteran Ryan Banerjee, the BIS veteran economy, the issue of zones was insignificant twenty years ago in the late 80s. Just 2% of the businesses were zoombies. BIS includes all enterprises in Australia, Belgium, Canada, Denmark, France, Germany, Italy, Japan, the Netherlands, Spain, Sweden, Switzerland, the United Kingdom, Italy, the United Kingdom and the United States.
Estimating how many businesses will be affected is hard. According to the World Bank, there are about 43,000 "listed" enterprises in the world, but many million more in the informal sectors. This BIS chart shows the unrelenting ascent of the zombies: Figures are worrying given the threats that "leveraged loans" represent to the wider economies: $1.6 trillion of high-risk, inferior business indebtedness that may be lowered, leading to a potential bulk sale as interest yields soar.
Whereas entities that manage managed loans are not identical to zoombies, the mean "interest coverage" of managed loans moves towards the area. It is a yardstick for the amount of interest a business has to bear in relation to its income. Indicator 1 means that a company's profit corresponds to its interest liabilities.
S&P Global Market Intelligence says the interest cover rate for LBOs, a commonly used type of LBO, has fallen by 17% since 2014, from a high of 3.37 to 2.79 this year: At the turn of the last centuries, most European businesses had investments graded loans.
As you can see, this next diagram from another recent BIS research document shows that zip-mie debts are tricky debts. In 2000, the credit rating system of all US, UK and European businesses began to deteriorate. However, in Europe and the UK, most firms at the turn of the last centuries had invest ment grades.
Well, most don't: Why are today's zoombies so widespread when they hardly even exist 20 years ago? Put bluntly, the zoombies have risen while interest has fallen. However, this is somewhat counter-intuitive as low interest rate levels should make it easy for businesses to repay their debt. Indeed, low prices have had exactly the opposite effect:
You made the loans cheap, so more businesses took them. Simultaneously, those who sought a high "return" were willing to make available funds to them because borrowed loans paid higher interest because of the associated risk: As both the offer and request for levered loans grew, the zip ratio rose eight-fold over the years.
They are bad for the international economies because they are competing with sound businesses for natural assets (such as offices or equipment), for capital finance; and they reduce overall production (if they were good, they would not need the loans). "Poor financial institutions are encouraged to lend lovers' loans to poor businesses and keep them on edge," he says.
By not overwriting them, they loose the few cash flows they have and they are compelled to delete the loans from their accounts - shown as an asset in their accounts. One of the main causes why former Fed chief Janet Yellen is so worried about debt financing is corporate zombies.
They are the businesses that will go up against the walls in the upcoming economic downswing. "I' m concerned about the systematic risk associated with these loans," Yellen said last weekend in the Financial Times. "Enormous worsening of standard has taken place; lifting of levered credit agreements. "Learn more about the booming market for leveraged loans: "If you want to care about something, that's it":
Feds and analysts warn against the $1 trillion leverage loan bubble.