Some 13% of companies may be zombies. (Source) Zombie. A word reserved for Halloween no more. Zombies have hit Corporate America.
Defining a zombie company depends on which finance person is asked. Here’s a Fortune magazine version: “Those firms which are not even able to cover their debt-servicing costs with current earnings.”
Definitions can get involved. “Isolating the difference between operating income and interest expense is a way of comparing the revenue that a company expects to become profit versus the cost incurred for borrowed funds. It is a variation of a leverage ratio.” (Source)
A short version: When high and long-lasting corporate debt takes center stage in a company’s life.
$7+ billion in debt for Santee Cooper is on-stage, debated for a long time now, and starkly evident with the failed nuclear project. The Charleston Post and Courier ran an editorial on Saturday, October 19, that pointedly questioned Santee Cooper’s record of planning, spending and debt on big projects.
Zombie companies may also have this issue: Is the debt useful? “There is also concern that some debt may not be financing productive investment. There is evidence that a large share of the borrowing that companies are currently doing is not being used to invest in growing their own productive capacity.” (Source)
Affordable debt has a place in business. “Adding debt allows companies to invest in the future by building new factories, buying equipment, hiring workers and researching next-generation products. … But zombie companies are wasteful.” (Source)
Tough circumstances that are acknowledged. To its credit, Santee Cooper posted the 2018 “Rating Outlook is Negative” notice from ratings agencies on its website, noting risk and financial leverage.
The utility also posted the June 2019 S&P Global assessment that says, “We believe that customer and political displeasure with supporting $4.5 billion of nuclear debt dilutes the financial flexibility that we typically associate with autonomous rate-setting authority and automatic pass-through mechanisms.”
In other words, noting that the Santee Cooper board has the power to change rates; it may be tough to do in this environment. A financial rock and a hard place? But, the board still has that ability to raise rates on customers without any state oversight.