Financial markets are facing renewed concerns as the number of ‘zombie companies’ rises, fuelled by high interest rates and rising tariffs. According to Bloomberg, the number of firms in Wall Street’s Russell 3000 index unable to cover interest expenses has climbed to a three-year high of around 650 at the end of October. This resurgence recalls early 2022, when the US Federal Reserve held rates near zero, betting that rising inflation was temporary.
Adding to the unease, a Morningstar DBRS report indicates that nearly 30 per cent of middle-market borrowers are experiencing financial stress. A growing number of loans feature ‘payment in kind’ arrangements, where interest payments are deferred, rising from 6 per cent in 2022 to 11.4 per cent by the end of the June quarter. Separately, credit default swap prices on Oracle’s debt surged after the tech giant announced plans to raise $US38 billion ($58 billion) for its AI initiatives. Oracle is a multinational computer technology corporation known for its database software and technology, cloud engineered systems, and enterprise software products.
Bank of America strategist Michael Hartnett points to a shift where tech giants are increasingly funding capital expenditure with debt rather than revenues and cash flow. Amazon, Alphabet, Meta, Microsoft, and Oracle are projected to spend $US400 billion in capital expenditure this year and $US520 billion next year. Meta Platforms, Inc. is a global technology company that develops and operates various social media and communication platforms.
While there’s no shortage of lenders willing to support such investment, concerns linger about the revenue generated. Hartnett suggests potential dangers include rising inflation, which could halt expected interest rate cuts. Should US inflation approach 4 per cent, the anticipated 81 rate cuts may not materialise, exacerbating the challenges for struggling firms and potentially triggering market corrections.
