I keep coming back to one number.

In the 12 months ending June 2025, large corporate bankruptcies ran 44% above their 20-year average. 117 filings. Against a long-run average of 81, according to Cornerstone Research.

That’s not noise. That’s a pattern. And when I look at where this falls in the debt cycle, it’s the same place every time.

Not after the crash. Just before it accelerates.

A zombie company has a precise definition. It’s a business that earns less from its operations than it pays in interest on its debt. Interest coverage ratio below one. It stays alive not because it’s viable — but because debt gets rolled, credit stays loose, and the math of survival just barely works.

The term was first coined in the late 1980s to describe banks allowed to stay open even though they were essentially wiped out by commercial-mortgage losses. It gained broader use when economists analysed Japan’s lost decade. Japanese banks evergreened loans to weak firms to avoid recognising losses on their own balance sheets — and the research found that zombies had negative externalities for healthy firms, reducing profits and lowering investment and employment growth across the whole economy.

That’s the part that doesn’t make it into the headline numbers. It’s not just that zombie companies fail. It’s that while they’re alive, they crowd out healthy businesses that could grow. They hold capital, employ staff, take up credit lines — all of which would otherwise flow to more productive uses. The economy gets slower. Then, when rates rise and the rolling stops, the failures come in waves.

Japan’s lost decade turned into more than two lost decades precisely because of zombie lending — misallocating capital away from productive firms amplified and extended the stagnation well beyond the initial crash.

A 2018 BIS paper tracking 14 advanced economies found that zombie firm rates had been growing since the late 1980s, reaching an average of 12% of all listed non-financial companies by 2016 — and that was before the zero-rate era of 2020–2022 pushed the figure significantly higher.

The pattern across financial history is consistent. An extended period of cheap credit creates companies that could not exist at normal rates. When the credit environment normalises, those companies become the first failure wave. The failure wave tightens credit for everyone else. And the cascade begins.

Here’s what’s different this time.

The zombie cohort created between 2020 and 2022 was born in the most extreme rate environment in modern financial history. The Fed cut to near-zero. Investment-grade corporate debt dropped below 2%. Companies that would never have survived a normal credit environment took on debt that worked at 1.5% — because the interest bill was small enough to cover.

Then rates went to 5.25%.

When I pulled Smart X Terminal this week, the Interest Rate Level reading came in at 67 out of 100. That figure reflects a sustained high-rate environment that has now been sitting on these balance sheets for two full years. Not a shock. A slow squeeze.

Here’s the mechanism. Zombie debt doesn’t get repaid — it gets refinanced. At 2%, that refinancing was survivable. At 5%, the interest bill on the same debt triples or quadruples. A business that was barely covering its debt service at low rates can no longer cover it at high rates. The loan gets called. The business fails.

This is exactly what Dalio’s big debt cycle framework describes in the late expansion phase. After a long period of credit growth, the weakest borrowers — those who only survived because credit was cheap — face a reckoning when rates normalise. They don’t all fail at once. They fail in sequence, and each failure tightens credit conditions for the businesses next to them. Lenders who were willing to roll zombie loans in 2021 are not willing to roll them now.

That 44% surge in large corporate bankruptcies is the first phase of that process.

Mega bankruptcies — companies with over $1 billion in assets — reached 32 filings in that same 12-month window. The 20-year average is 23. These aren’t small businesses struggling with rent. These are significant balance sheets unwinding.

This is not abstract. When I look at Smart X Terminal’s macro readings right now, the environment fits the late-cycle zombie cleanup pattern precisely.

Asset price level is at 88 out of 100 — still elevated, meaning the credit stress hasn’t yet repriced fully into equity markets. Credit spreads are at 20 out of 100 — historically compressed. That sounds reassuring. It isn't. When spreads are tight during a rising bankruptcy wave, it means lenders are still pricing debt as if the risk hasn't changed. That's complacency. And historically, compressed spreads in a deteriorating credit environment don't hold — they gap wide fast. Debt service ratio is at 32 out of 100, with raw debt-to-GDP at 337.9%.

This is early-stage. The numbers say the cleanup has started, but the cascade hasn’t hit.

The businesses most at risk are easy to identify. They share common characteristics: negative or thin operating income, heavy debt loads, no margin for sustained high rates, no credible path to profitability without cheap refinancing. When I run the Safety screen across 514 stocks right now, the bottom of the range — LCID (score 6/100), RIVN (score 8/100), UPST (score 11/100) — reflects the type of balance sheet that the zombie cleanup mechanism historically takes first. These are not stock recommendations. They’re signals of the kind of business built for 1% rates, not 5%.

The businesses on the other side are the ones worth watching. TSM (78), RMD (75), INCY (74) — high Safety scores, strong interest coverage, cash generative. These businesses don’t just survive credit contractions. They tend to come out the other side stronger, as weaker competitors disappear and asset prices fall to levels that reward discipline.

The framework is simple. In a zombie cleanup, you want to hold the businesses built for 5% rates, not the ones built for 1%.

This is the framework I apply every week — separating the businesses built to survive from the ones built to fail. Smart X Terminal runs this exact screen across 514 stocks in real time. This is what my $400K portfolio is built on.

One question — when you look at your own portfolio right now, how many of the businesses you’re holding could survive their debt being refinanced at today’s rates? Hit reply. I read every single one.

If you find this article interesting, please let us know your thoughts down below here. We also have have other similar articles on our website too.

Sharing with you the tools I’m using at the moment.

📚 Books I read: https://smartxcapital.com/books

I’m building something for investors who want to move smarter — not faster.

A place where we’ll track these cycles together, share real-time insights, and learn how to invest with the cycle — not against it. I’ll be offering workshops, tutorials, and in-depth guides to help you build a timeless investing system that grows through every boom and bust.

📚 The Smart X Capital Platform is coming soon — a place to learn, connect, and stay ahead of every major market cycle using data, history, discipline and our community.

👉 Join the Smart X Capital Platform Waitlist

Because when every major cycle converges — the prepared don’t panic. They profit.

Talk soon,

Ace — Smart X Capital’s Founder