How should risk professionals think about the rise in corporate indebtedness?

Colin Ellis
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Colin Ellis: Visiting Research Fellow, Birmingham University, UK

Journal of Risk Management in Financial Institutions, 2021, vol. 14, issue 2, 161-172

Abstract: The COVID-19 pandemic has led to significant disruptions to economic activity, accompanied by a substantial increase in companies’ debt loads. The unique nature of this crisis and the quantities of debt accumulated pose challenges for assessing the risk implications. It is important to start with a clear macroeconomic perspective and benchmark; importantly, while lockdown measures have led to significant economic disruption, the medium-term impact is likely to be smaller than the 2007/2008 Global Financial Crisis. At the same time, financial market access for issuers was robust last year, with issuance surpassing pre-COVID-19 averages. Similarly, current refinancing profiles indicate that near-term liquidity risks are not pervasive across the business sector as a whole. Given that past corporate deleveraging across advanced economies (AEs) has typically been driven by profit growth, it may take several years for debt metrics to unwind after the pandemic has been brought under control. Against this broad backdrop, there are significant differences visible across sectors: one important differentiator is the rise in gross versus net debt, and the relative evolution of these metrics will provide a useful indicator as the pandemic continues. Finally, there is little sign that the extraordinary fiscal support provided by AEs has led to heightened concerns about sovereign risk among forward-looking investors, with investors not demanding higher yields despite the unexpected higher debt loads. This means that simply assuming support will remain in place until the pandemic has subsided should be sufficient, at least until investor perceptions change significantly.

Keywords: COVID-19; debt burdens; gross and net debt; sovereign-borrowing costs (search for similar items in EconPapers)
JEL-codes: E5 G2 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (1)

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