Zombie company

"Zombie company" is a media term for a company that needs bailouts in order to operate, or an indebted company that is able to repay the interest on its debts but not repay the principal.

Description

Zombie companies are indebted businesses that, although generating cash, after covering running costs, fixed costs (wages, rates, rent) they only have enough funds to service the interest on their loans, but not the debt itself.[1] As such they generally depend on banks (creditors) for their continued existence, effectively putting them on never-ending life support.

History

The term "Zombie Company" was applied to Japanese firms supported by Japanese banks during the period known as the "Lost Decade" after the collapse of the Japanese asset price bubble in c.1990. Japanese banks continued to support weak or failing firms.[2] The retailer Daiei is an example of a large company that expanded greatly during the period leading to the 1990 crash, and under different circumstances would have been expected to have entered receivership or bankruptcy. The finance minister Takeo Hiranuma was reported as describing the 96,000 employee firm as being 'too big to fail'.[2][3]

The term regained popularity in the media during 2008 for companies receiving bailouts from the U.S. Troubled Asset Relief Program (TARP).

By 2016 following economic downturn in China (see also 2015–16 Chinese stock market crash) Chinese industrial companies (steel, aluminium, paper etc) had developed gross overproduction capacity problems, with overcapacity rising from 0% in 2007 to an average of 13% by 2015, with figures higher than 30% in some industries (cement, steel in 2014).[4] At the 2016 National People's Congress the country's government recognised the issue of the 'Zombie Enterprises' and announced that it was to close or reorganise many state owned (public) industrial companies by 2020.[5][6] In coal and steel industries resultant loss of work was expected to result in 1.8 million redundancies (15% of workforce), with total redundancies estimated to be up to 6 million workers.[7]

See also

References

  1. ↑ 'Zombie' companies eating away at economic growth, BBC, 13 Nov 2012, "A zombie company is one which is generating just about enough cash to service its debt, so the bank is not obliged to pull the plug on the loan," (Mark Thomas, PA Consulting)
  2. 1 2 Denny, Charlotte (20 Nov 2002), Japan's zombie economy - not buying but browsing, The Guardian
  3. ↑ Brooke, James (October 29, 2002), They're Alive! They're Alive! Not!; Japan Hesitates to Put an End to Its 'Zombie' Businesses., New York Times
  4. ↑ The march of the zombies, The Economist, 27 Feb 2016
  5. ↑ China to clean-up 'zombie' companies by 2020: Xinhua, Xinhua / Reuters, 17 Jan 2016
  6. ↑ Tu, Lianting (8 Mar 2016), China's Takeover Troubles Putting Xi's 'Zombie' Reforms to Test, Bloomberg, "We will address the issue of ‘zombie enterprises’ proactively yet prudently by using measures such as mergers, reorganizations, debt restructurings and bankruptcy liquidations," (Li Keqiang)
  7. ↑ Petricic, Sasa (3 Mar 2016), "Massive layoffs coming as China confronts its overbuilt 'zombie economy'", CBC News
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