When Cheap Debt Turns Toxic: The Rise of Corporate Zombies

As Halloween decorations come down, a more enduring threat is creeping through credit markets: corporate zombies.

These are companies that can no longer generate enough profit to cover their interest payments. In October alone, nearly 100 new firms joined the ranks, bringing the U.S. total to 639, the highest since late 2021.

What is Driving the Surge?

Many of these companies loaded up on cheap debt during the pandemic, taking advantage of historically low interest rates. But the landscape has shifted dramatically:

• Interest rates have surged, making refinancing significantly more expensive.

• Tariffs and trade tensions remain elevated, squeezing margins.

• Federal support is waning, especially in sectors like healthcare and biotech.

As a result, companies that were barely surviving at zero rates are now struggling to stay afloat. Even well-known names like Lionsgate Studios and Altice USA are showing signs of distress, with some bonds trading at deeply discounted levels.

The Anatomy of a Zombie

A corporate zombie is typically defined as a company whose interest coverage ratio, the ability to pay interest from operating earnings, falls below 1. This means the firm is not generating enough income to service its debt, often relying on new borrowing just to stay alive.

While this does not always spell immediate doom, it is a red flag.

Persistent underperformance can lead to loan covenant breaches, credit downgrades or even default.

Implications for Investors

At Intrasia Wealth, we view the rise of zombie companies as a critical inflection point in the credit cycle. It is a reminder that:

• Balance sheet quality matters more than ever.

• Sector resilience is key. Some industries are more exposed to macroeconomic headwinds.

• Maturity walls are approaching, and refinancing risk is real.

As David Rosenberg of Oaktree Capital put it: “These balance sheets were structured when rates were low. They don’t necessarily work when rates are high.”

Navigating the New Normal

Zombie status is not a death sentence. Companies can recover by cutting costs, restructuring debt or raising equity. But the path is narrow and not all will make it.

For investors, this environment calls for:

• Selective credit exposure

• Active monitoring of debt maturities and refinancing trends

• A focus on quality and cash flow durability

At Intrasia Wealth, we are helping clients navigate this evolving landscape with a disciplined, forward-looking approach.

Want to know how we are positioning portfolios to manage credit risk and uncover opportunity? 

Let’s talk.