The zombie companies

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Ethan Wu (0:36)

Thank Pushkin, zombie companies. These are companies without functional business models that limber on and walk the streets of corporate America, kept alive by a supernatural drip feed of cheap capital. But now that the Federal Reserve has called time on such cheap capital and interest rates are 5% and there's not money everywhere, people are wondering if all these zombies are gonna make it to the other side.

This is Unhedged, the markets and finance show for the Financial Times and Pushkin. I am reporter Ethan Wu here in the New York studio, joined by Katie Martin in London, back from the dead at last.

Katie Martin (1:14)

Yes, I had a small detour to eat some brains of my own. No, I was slightly zombie like. I managed to get Covid for a fifth time, which I mean, it's not quite a record, but I feel like it's a solid, solid performance, but it wiped me out. So I was out of action for a little bit.

Ethan Wu (1:34)

Katie, you have had the most Covid cases of literally anybody I know in my work or personal life.

It's incredible. I bring you up all the time for that reason.

Katie Martin (1:43)

It's not like I'm going around like licking door handles or something. I don't know why I keep getting it, but it likes me.

Ethan Wu (1:50)

Well, Katie, we are glad you are feeling better. And today we want to talk about, not health-related zombies, but corporate zombies, companies that have business models that may not work in a world where interest rates are high and money is more expensive.

And I think the big flashy example that's gotten a decent amount of attention recently is WeWork, right? This slightly ridiculous real estate company founded by Adam Newman that was going to solve every problem under the sun went bust this month. And I think it's created some predictions that it's sort of the first of many of companies birthed in the cheap money era that simply is just not going to survive.

Katie Martin (2:27)

Yeah, what if this kind of laughably run real estate company effectively, this office space company, littered with every excess of the cheap money era? What if this is a sign of things to come?

The answer is kind of yes and no. I mean, WeWork was just a badly run company, always had been. And sure, it wouldn't have got off the ground if it hadn't been for cheap backing from venture capital companies and from just cheap money in the debt markets. But there is definitely a big concern out there that although WeWork might be the biggest, shiniest, arguably most ridiculous example of stuff that happened in the easy money era, there are lots of other companies out there that have also loaded up on cheap debt. And now a couple of bad things are happening. First of all, if you are a company that's not the safest company in the world, you've got a bit of a risky profile, you've probably borrowed on a floating rate basis, which means that your interest payments go up and down in line with the benchmark interest rate. I say up and down, that's up and up, and up.

And so, monthly repayments for a lot of these, particularly smaller companies, are getting really onerous at this point. And there's a lot of companies that are kind of struggling to keep on top of their debts.

And the more pessimistic people out there in markets say, see, this is the reckoning, it's coming. There's a lot of corporate America and corporate Europe, for that matter, that is gonna hit a wall where it simply cannot keep affording to make these interest payments. And the other bit is refinancing, is taking on new debts, a significantly more expensive undertaking than it was when Covid hit.

Ethan Wu (4:00)

Absolutely, and it's definitely broader than just WeWork, right? If you look at the Russell 3000, which is like a big, broad index of US companies, a big, small, medium size, nearly a quarter of them cannot cover their interest expenses month to month with cashflow, with the money that they're getting from their operations. That's a scary number. There's a lot that don't turn a profit, and interest expenses, like you said, Katie, have not been going up and down, they've been going up.