Zombie Companies: How Cheap Debt Created a Fragile Corporate Landscape

📅January 7, 2026 at 1:00 AM

📚What You Will Learn

What defines a zombie company and why cheap debt fueled their rise.
Economic dangers of zombies and how rate hikes expose them.
Refined metrics for spotting true zombies vs. temporary strugglers.
2026 impacts, from US debt surge to UK unemployment risks.

📝Summary

Zombie companies are unprofitable firms surviving on cheap debt, unable to cover interest payments or grow, propped up by low rates.

As interest rates rise in 2026, these 'undead' businesses face extinction, threatening jobs and economies.

This article explores their rise, risks, and fallout from prolonged easy money.

ℹ️Quick Facts

US zombie firms hit 639 in 2026, highest since 2021, amid debt crunch.
Zombies make up 3.4% to 13% of firms depending on definition, with $200B+ in net debt.
UK zombies could surge unemployment as rates, energy costs, and wages rise.

💡Key Takeaways

Cheap debt from low rates kept zombies alive, distorting markets and productivity.
Rising rates in 2026 are killing zombies, risking job losses but freeing resources for healthy firms.
Better definitions using cash flows reveal fewer but more persistent zombies at 3.4% of firms.
Zombies enjoy 145 basis point interest subsidies, undercharging their true risk.
They lock up talent and capital, harming overall economic growth.

Zombie companies are mature firms, often over 10 years old, that generate just enough cash—or not enough—to service massive debts. They limp along without repaying principal, sustained by cheap credit rather than profits. The OECD defines them as having interest coverage (EBIT to expenses) below 1 for three straight years.

Newer metrics refine this: firms failing to cover interest with recurring cash flows over three years, in at least two individual years. This catches structural underperformers, not temporary ones. Unlike startups, these are 'uncompetitive survivors' blocking dynamic growth.

Ultra-low rates post-2008 and during COVID flooded markets with cheap debt, letting weak firms borrow without accountability. Bloomberg noted US zombie debt in Russell 3000 hit $2 trillion by 2020, up 25%. Banks charged zombies only 125 basis points more than healthy firms, despite needing 270 bps for risk parity—a 145 bps subsidy.

This forbearance created fragility: zombies hoarded resources like talent and capital that healthier rivals needed. Globally, estimates peg 10% of firms as zombies, concentrated in manufacturing and retail.

Higher rates in 2026 are biting: US zombies surged to 639, unable to cover debt costs. UK think tank Resolution Foundation warns of unemployment spikes from zombies buckling under rates, energy bills, and wage hikes. Goldman Sachs pegs refined US zombies at <4%, or $200B net debt.

De Jonghe et al. estimate true zombies at 3.4%, far below OECD's 10.4%, but persistent and risky. As debt costs soar, expect bankruptcies, but also reallocation to productive firms.

Zombies drag productivity by surviving on bailouts or subsidies, lowering economy-wide efficiency. They stifle innovation, as scarce resources stay trapped. Yet, culling them could boost growth long-term.

Watch for sector pain in mining, food, and retail. Policymakers face dilemmas: bailouts save jobs short-term but prolong fragility. Investors, screen for low coverage ratios and cash flow failures to dodge the undead.

⚠️Things to Note

Definitions vary: OECD uses interest coverage <1 for 3 years in 10+ year firms; new metrics add cash flow persistence.
Concentrated in manufacturing, mining, retail; not just tech or startups.
Some zombies employ many, prompting bailouts to avoid mass layoffs.
Goldman Sachs filters shrink US zombies to <4% by excluding underperforming equity.

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