Corporate Zombies May Rise With Slow Economic Rebound, BIS Says
(Bloomberg) -- A slow economic recovery threatens to turn more companies in the industries worst hit by the pandemic into so-called zombies, according to a report by the Bank for International Settlements.
Without a significant rebound, corporations in sectors such as travel and leisure that loaded up on debt in the pandemic risk being left unable to cover debt servicing costs from current profits, according to the BIS, which is known as the central bank for central banks.
But the report also outlines a more optimistic scenario, in which earnings return to pre-Covid-19 levels, “which might be consistent with a swift vaccine rollout and broad-based recovery in economic activity”. In that case, the risk of a significant increase in zombification is low, according to the report.
“Significant increases in leverage and weak earnings forecasts in some sectors suggest that for some firms, greater credit extension may have only postponed, rather than canceled, their insolvency,” according to the report.
The rate of bankruptcies remained low throughout the pandemic even as unemployment spiked and economies shrank, largely because of credit support provided by governments and international capital markets. That may change in an environment of continually slow economic activity, adding pressure on firms overburdened with debt, according to the report.
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