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Practice paper

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

Colin Ellis
Journal of Risk Management in Financial Institutions, 14 (2), 161-172 (2021)
https://doi.org/10.69554/WMRG8764

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

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Author's Biography

Colin Ellis is a Visiting Research Fellow at Birmingham University. He is also employed by Moody’s Investors Service following stints at the Bank of England, Daiwa and the BVCA. He has published on a range of topics including investment, pricing, private equity, data uncertainty, monetary policy and credit risk. The contents of this paper represent the views of the author and not any institutions he is (or has previously been) associated with.

Citation

Ellis, Colin (2021, March 1). How should risk professionals think about the rise in corporate indebtedness?. In the Journal of Risk Management in Financial Institutions, Volume 14, Issue 2. https://doi.org/10.69554/WMRG8764.

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cover image, Journal of Risk Management in Financial Institutions
Journal of Risk Management in Financial Institutions
Volume 14 / Issue 2
© Henry Stewart
Publications LLP

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