zombie
June 25, 2020
–Yields eased a bit as stocks and crude oil tumbled. The ten year fell 2.5 bps to 68.2. SPX down 2.6% and CLQ0 settled -2.36 at 38.01. Option activity was light. July treasury options expire Friday. Increased virus fears appear to be the driving factor. News today includes Durables, expected +10.5% and Jobless Claims at 1.23 million. Seven year auction.
–I’ve attached a chart (from Mauldin Charts that Matter) which shows the rise of ‘zombie’ companies – those with earnings that are unable to cover interest expense. The chart shows that nearly 20% of listed companies now fall into this category. In a world where rates continue to fall, one would expect this line to be leveling off or even falling. Instead we have the merry-go-round of more companies needing to borrow just to service previous debt. I’m not sure the government, soon to be in the same boat, can help this problem. However, a BBG story notes that Illinois was able to cut its backload of unpaid bills from $6.9 billion to $4.8 billion this month after tapping Federal Reserve aid. I recall a previous story noting that unpaid bill balances accrue at an interest rate of 12% in IL.
–33 bp yield on the 5-year auction yesterday of $47 billion. This at a time when the market cap of AAPL increased $300 billion since the beginning of May. The framework of debt/interest/equity prices is now random.
**The official definition of a zombie company according to the Bank for International Settlements (BIS) “is a publicly traded firm that’s 10 years or older with a ratio of earnings before interest and taxes (EBIT) to interest expenses of below one.” More simply put, zombie companies are companies that are unprofitable — so unprofitable they are unable to pay even the interest on their debt out of their profits. They are effectively bankrupt but kept alive by banks continuing to lend them money to pay their existing loans.
