What are zombie companies?

Zombie companies are firms that have operated for an extended period without generating enough operating income to cover their interest expenses from recurring business operations. The Bank for International Settlements (BIS) defines them as companies with an interest coverage ratio (EBIT/interest expense) below 1.0 for at least three consecutive years. These firms survive not by generating genuine economic value but by continuously refinancing their debt, often at favorable rates during periods of loose monetary policy.

The zombie company phenomenon grew substantially during the post-2008 era of near-zero interest rates and quantitative easing. The BIS estimated that zombie firms represented roughly 12-15% of listed companies in advanced economies by 2020, up from approximately 2% in the 1980s. Ultra-low borrowing costs allowed these companies to keep rolling over their debt, while the search for yield among investors made capital available even to marginal borrowers. Each wave of monetary easing created conditions for more zombies to persist.

The economic costs of zombification are significant. Zombie companies tie up labor, capital, and resources in low-productivity uses, reducing the dynamism and efficiency of the broader economy. They contribute to the "productivity paradox" by keeping alive businesses that would otherwise fail, freeing their resources for more productive uses. They also distort competitive dynamics, as healthy competitors face pricing pressure from zombies that do not need to earn adequate returns because their continued existence depends on debt refinancing rather than profitability.

Rising interest rates in 2022-2024 posed an existential threat to many zombie companies. As borrowing costs increased from near-zero to 5% or higher, firms that could barely cover their interest expenses at old rates faced impossible math at new ones. This "maturity wall," the schedule of debt coming due that must be refinanced at higher rates, was expected to trigger a wave of defaults and restructurings. The actual wave proved smaller than feared, partly because strong revenue growth in some sectors improved coverage ratios and partly because private credit markets provided alternative financing. Still, the zombie phenomenon remains a structural risk that rises and falls with the interest rate cycle.