Zombie Companies’ 20-Year Rise May Be Over, Deutsche Bank Says

(Bloomberg) -- The number of zombie firms, which spend more on interest than they earn, may have finally gone into reverse, according to Deutsche Bank AG analysts.

Data gathered by the bank suggest the incidence of zombie companies dropped sharply in 2017, after rising to 2 percent of all firms in 2016, from 0.6 percent in 1996, as growth picked up and monetary policy started tightening. That may be enough to convince central bankers to increase interest rates even further, according to the report published on Thursday.

"If this proves to be a trend, it may give the authorities confidence that continuing to raise rates and pull away from unconventional monetary policy will have some advantages,” analysts Sahil Mahtani and Luke Templeman, and strategists John Tierney and Jim Reid said.

The proliferation of zombie companies partly reflects the propping up of growth with cheap money since the global financial crisis. That's allowed teetering firms to stay afloat and depressed productivity by diverting resources from healthier businesses.

Low interest rates “reduce the incentives for banks to pull the plug and call in their loans, because the returns by lending out that money elsewhere would not be much higher,” the researchers said. “Today, perhaps we are at a turning point.”

The report defines zombie companies as those with an interest coverage ratio of less than one for two consecutive years, and a price-to-sales ratio of under three times. With two thirds of data for 2017 in, the incidence of zombie companies in the FTSE All World index dropped below pre-crisis level, according to the report.

Europe has the highest percentage of zombie companies compared to the U.S. and Asia Pacific. Three quarters of the zombies are energy and financial companies, the data show.

To contact the reporter on this story: Luca Casiraghi in London at lcasiraghi@bloomberg.net.

To contact the editors responsible for this story: Abigail Moses at amoses5@bloomberg.net, Chris Vellacott

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