Major brands among over-indebted 'zombie' firms struggling to make ends meet

Some of the world's best-known brands are so heavily in debt that they're not even making enough money to cover the interest on their loans.

According to a recent AP report, "zombie companies" include the firms that run Carnival Cruise Line and JetBlue Airways, as well as the beloved Manchester United soccer team over in the U.K.

The analysis found that nearly half of "zombie" companies are located in America, with many at risk of bankruptcy unless the Federal Reserve reduces interest rates soon.

Much of these woes link back to Covid, as many major brands lacked the financial means to withstand the pandemic and took on debt.

In its first quarter report, Carnival disclosed that it has a long-term debt pile of $28.5 billion and spent $471 million on servicing debt in three months alone.

"Our substantial debt could adversely affect our financial health and operating flexibility," the last in a long line of risk factors warns.

JetBlue is contending with $5 billion of debt, and lost $716 million over the same period. Despite the gloomy numbers, the company insisted these results "exceeded expectations."

"Category 5 hurricane"

Worryingly, the zombies identified collectively employ 130 million people across a dozen nations, according to the report.

If major layoffs ensued, it could set off a multiplier effect, stifling consumer spending and ultimately harming each company's rebound due to shrinking revenues.

While some analysts believe that the pandemic exacerbated the issue of corporate debt, and the high number of zombie companies is nothing more than a blip, many vulnerable firms are saddled with variable-interest rates loans.

And with the Fed reluctant to cut the base rate in a hurry, there could be some prolonged pain ahead.

The report went on to suggest that stock buybacks, designed to placate and even woo investors, are often a driving force in companies taking on astronomical amounts of debt.

For now, zombies have little choice but to try and refinance existing loans, but that may only amount to kicking the can down the road.

"They aren’t on anyone's radar yet, but they are a hurricane. They could be a Category 4 or Category 5 if interest rates don’t go down," Valens Securities managing director Robert Spivey told the AP.