Commodity Watch: The Return of the Corporate Zombie

<div class="grid grid--33-66-col"><div class="col"><img loading="lazy" src="/getContentAsset/061c994a-a452-418f-bfa0-f2cf3cf5c577/cb87803a-320c-480f-ab75-7b9029eaaf79/Ahmad-Al-Sati-new.png?language=en" alt="Ahmad Al Sati - insights" title="Ahmad Al Sati - insights" style="width: 180px" class="fr-fic fr-dii"></div><span style="font-size: 12px"><div class="col"><strong>AHMAD AL-SATI<br></strong>PORTFOLIO MANAGER<br><br><p>Ahmad is the President and Portfolio Manager for Gemcorp Capital Advisors LLC, based in New York.&nbsp;<br><br>Ahmad has spent most of his career in the global credit markets. Prior to Gemcorp, Ahmad was President of Pandion Mine Finance and RiverMet Resource Capital, LP - a fund focused on investing in precious metals, where he was responsible for managing the investments and the day-to-day operations of the registered investment adviser.&nbsp;</p></div></span></div><hr><p>Zombies continue to proliferate. The number of companies that can’t service debt from current profits has been growing by around~9% annually between 2010-2023, (and significantly since). In 14 developed markets, the share of “zombie” firms relative to the total number of companies rose from 2% in 1980 to 12% in 2016.- The companies are staying as zombies longer because they avoid real restructurings.</p><p>Corporate zombies were first discussed in a paper about Japanese borrowers in the 1990s. After the Japanese bubble burst, most Japanese banks would have been considered insolvent, but regulators gave them leeway in managing their loan portfolios. The concept of Kin’yu shien (“financial assistance”) allowed the banks to pursue pseudo restructurings by extending maturities, lowering rates and forgiving debt. Yet increased zombification causes market distortions and harms both the corporate living and undead. Japan was no exception. Healthy firms suffered as the Nikkei continued to drop and the government still had to capitalize the banks.</p><p>In the US, three trends may increase zombification.&nbsp;</p><p>One, past low rates create refinancing risk especially for loans that were issued around COVID and are now coming due. Approximately $600 billion of loans were issued in 2021 at historically low rates and peak leverage.&nbsp;</p><p>Two, distressed US companies increasingly rely on liability- management exercises (LMEs), which only serve to postpone the reckoning (no one is ripping the band aid off anymore).&nbsp;</p><p>Three, since the GFC, the US economy moved away from cyclical high capex businesses (that periodically suffer distress) to asset-light companies (that seemed not to). As AI disrupts these borrowers, cash flow loans to asset- light companies means de minimis recoveries unless those companies are kept alive.</p><p>So, US Kin’yu shien?</p><p>Maybe.&nbsp;</p><p>Lenders are increasingly allowing borrowers to use Payment-in-Kind (PIK). Per Lincoln International, 11% of 7,000 loans are using PIK. 58% of those are “bad PIK”, i.e. loans that started as cash pay (PIK does not actually fix any issues but does keep borrowers alive). LME is not helping. Per a Harvard study, 56% of borrowers filed for bankruptcy at least 2 years post an LME. The fissures are showing. Lenders in 2025 foreclosed on 2x the amount of debt they did in the prior three years combined.</p><p>Private credit funds gorged on loans to US health care, software and US Leveraged Buyouts. As these portfolios go through a period of indigestion, investors may want to seek diversification across other credit verticals. Matching the assets and liabilities of an investment vehicle matters most. A strategy and its fund structure must fit. You can’t force it. Collateral and duration may also help. Duration may allow investors to manage risk in an increasingly volatile market, and hard assets may serve as a floor for recovery. Credit still has a role in portfolios. Which type of credit requires an examination of the principles that underpinned allocations for the last 15 years.</p><p><img loading="lazy" src="/getContentAsset/73c9fcee-8e4d-4a1d-af23-492d24e3ebae/cb87803a-320c-480f-ab75-7b9029eaaf79/zombie-comanies-graph.jpg?language=en" alt="Zombie companies graph" title="Zombie companies graph" style="width: 100%" class="fr-fic fr-dib"></p>