Let me start with those basic questions. What exactly is a zombie company and how many of them are there out there. First
of all to take a step back. What you need to think about is that over the past 10 or 15 years global debt levels have
skyrocketed. We've had very low interest rates. And for example non-financial corporate debt around the world is now close to
100 percent of GDP and that's more than double what it was a decade ago. So that's a very worrying backdrop. And so what we
mean by zombie companies is a company that essentially has to borrow to keep going. They're highly leveraged. They're not
growing very fast. Their revenues are not up to par. And at the moment they face a very difficult situation. You've got higher
input costs. So you're commodity prices are higher. Wages are rising at the same time. You don't earn enough revenue to cover
all of these higher costs and your debt service. So if you have a ratio of revenues to interest costs that's one or less. If you
can barely cover your debt service costs we call you a zombie company and it's a very good name. It's very evocative. And for
how many Emmys is difficult to calculate. Right. Because for a lot of firms that for example aren't publicly listed. The
information might be less available. They might be smaller non-public companies. But the Federal Reserve estimates that
between five and 10 percent of U.S. firms fall into this category. It's also important to remember that this is not a
static world. It's not one zombie always a zombie. Conditions change. And in fact becoming a zombie company is a little bit
cyclical in the sense that when times are good maybe interest rates are low. Growth is high. Maybe you're not a zombie but
then you know that things happen. Pandemics happen. Shocks happen. Interest rates go up. And a company that was formerly
doing reasonably well might suddenly fall into the zombie category.
So you mentioned the overall debt load which is true certainly United States and not just in United States in part because
interest rates are so low. There are some very very successful healthy companies that loaded up on debt because it was so
cheap. But whenever we've talked about this risk in the last few years is that don't worry as long as interest rates are low
we're fine. It looks like those days may be on their way out. We have higher interest rates. So what kind of pressures that put
on these zombie companies. Well I think it's a good analogy right. It's all fine until it's not. And so you've had a kind of
a confluence of factors that have hit pretty much at the same time. You had a pandemic which hit growth. You had commodity
price shock. You have rising inflation. You have higher interest rates. And you also have firms whose whose business models for
example have been entirely changed by the pandemic. I mean amongst the list of zombie companies you might find a company
like we work you know a company that has been very successful. But at the same time the pandemic has changed a lot of things
for that for that company. Carnival Cruise Lines is another good example of a type of company who is now in the zombie category
or some of the meme stocks. You know AMC or GameStop. So these are really household names. And I think that the difficulty is
at a point in time when you've got wages rising when you have higher input costs these firms may not be able to borrow as much
as they need to borrow to keep afloat. So you do tend to find zombie companies concentrated in certain sectors or in certain
sized corporations. So I think it's fair to say that the sectors that are worst off in terms of percentage of zombie firms are
probably in manufacturing and in retail. And retail of course is an industry that's undergoing secular change over the long term
as we move to sort of more online no less brick and mortar. I are there are underlying structural issues there and in that
sector in any case. But I think some of the companies that are hardest hit tend to be smaller firms. And if you think about a
small company they're sort of inherently face greater credit risks than some of the larger better established companies that
have long standing histories and track records in borrowing. They're you know familiar to investors. Smaller companies have a
harder time accessing funds especially when when borrowing conditions are difficult. And with some of these companies
having fallen on hard times during the pandemic you know there are estimates that suggest that in some cases as much as 25 30
percent of the small cap companies especially if you include unlisted companies could be falling into this sort of zombie
trap. I want to say with the larger effects on the economy. Obviously we don't wish ill for any corporation but there's
gonna be a lot of stress put a lot of the companies you're describing right now insofar as that all gets sorted out to use
a euphemism perhaps. Is there some benefit for the economy in redeploying the capital. They represented the things that might
be more productive than their enterprises. I think we might want to think about this in a short term and a long term context. So
in the short term it is very helpful for the economy to keep these companies
afloat. And you could think of the example of Japan here which has spent over eight hundred billion U.S. dollars since the
pandemic hit to support its companies. So you avoid bankruptcy you keep people employed you keep these company afloat. But
there's a longer term costs to be paid for that because when you think about it money that's being spent to keep zombie companies
afloat is money that could be more productively deployed elsewhere. You could put it in due to capital spending. You
could put it into infrastructure. You could put it into new industries new technologies maybe in the ESG world or green
technology that can really deliver a boost to productivity and growth. So it's kind of a foregone opportunity in that sense at
the system for the reasons you describe. And the example of Japan is a good one. It strikes me there are political
consequences of letting zombie companies go belly up. Well you know the politics of these things are always difficult. Right. I
mean one of the conclusion is that you can come to is that if you have a high proportion of zombie companies if you have
companies that you're worried about keeping afloat there's political pressure to keep that going. The more that borrowing
costs rise the more that interest rate rise the harder time these companies will have keeping going. So if you're in a world
where inflation is rising and you have central banks having to make a very difficult balance between controlling inflation and
supporting growth which can involve supporting some of these less profitable companies you know it's it's it's a rock and a
hard place. You know where do you where do you draw the line. I wonder if as you if in fact the Fed could be held responsible
for this many zombie companies and maybe it's not with their intent but it certainly was a consequence of extraordinarily low
interest rates for a long time. Well I think ultimately has arbiters of the price of money. You could hold the Fed
responsible for it for everything really. But certainly it was an inadvertent consequence of low interest rates. I mean if you
think of the the many many years when we had low and in some countries even negative interest rates there were warnings
sounded all the time. There are risks to financial stability. There are risks to long term growth. It's going to stoke
inflation. It's going to distort financial markets is distort asset valuations. And in fact you can think of zombie companies
as a type of distorted asset valuation. Right. Because a company that cannot generate enough revenue to support its debt service
in its running costs arguably is trading at an inflated valuation because it can continue to borrow at low rates. So you
could sort of put it on the backs of central banks but it's it's certainly an inadvertent consequence of something that had to be
done to keep growth going during the after the financial crisis.