Glossary - Zombie Company
A zombie company is a firm that is able to continue operating but is financially unhealthy and has been unable to pay off its debts for an extended period. These companies are usually on the edge of bankruptcy but manage to survive mainly by paying the interest on their loans without being able to pay off the principal debt. They often lack the necessary funds for growth or expansion and may rely heavily on restructuring, refinancing, or external financial support to remain operational.
Also known as
- Undead Company
- Living Dead
Use cases examples
- Financial Statement Analysis: Company XYZ has been classified as a zombie company due to its prolonged inability to cover debt principal with its current cash flow; it is barely covering interest payments.
- Loan Agreement: The covenant package will include a clause allowing for renegotiation of the terms should the borrower be at risk of becoming a zombie company, as determined by continuous operational losses and inability to decrease leverage.
Considerations for investors
- Conducting thorough due diligence to identify potential zombie companies in the portfolio or target investments.
- Considering the long-term viability and potential exit strategies for investments in companies with signs of becoming zombies.
Considerations for founders
- Understanding the importance of sustainable growth and avoiding over-leverage to prevent falling into a zombie state.
- Exploring strategic opportunities for restructuring or finding new investment to steer the company back to financial health.
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