Stress Testing U.S. Leveraged Corporates in a COVID-19 World

Abstract

This paper analyzes a group of 755 firms, with aggregate indebtedness of US$6.2 trillion, to assess the solvency risks and liquidity needs facing the U.S. corporate sector based on projections of net income, availability and cost of funding, and debt servicing flows under different stress test scenarios. The paper finds that leveraged corporates account for most of the potential losses arising from the macroeconomic stresses associated with the COVID-19 crisis, with a concentration of these losses in the oil and gas, auto, and capital and durable goods manufacturing sectors. However, potential losses from corporate debt write-downs appear to be a fraction of banks’ capital buffers and, given the size of the leveraged segment and the relatively long duration of that sector’s debt, the near-term liquidity needs of these corporates appear modest. Corporate stresses could, however, amplify the current economic downturn—as firms cut investment spending and reduce employment—potentially giving rise to significant indirect losses for the financial system.

Global Corporate Stress Tests—Impact of the COVID-19 Pandemic and Policy Responses

“…Various publications have assessed corporate stress resulting from the ongoing Covid-19 pandemic. Close to our work, Caceres et al (2020) stress test the liquidity and solvency of US publicly listed corporates in a Covid-19 pandemic forward looking macroeconomic scenario, but they do not assess medium-term viability. IMF (2020d) makes use of a structural model to assess liquidity and solvency risks of European NFCs during the 2020 pandemic shock and the role of policy support, while Bank of England (2020) quantifies the cash balances of large firms and SMEs under a central scenario while allowing for behavioral responses, and assesses the extent to which policies in place may suffice to close cash deficits.…”

“…ECB (2020) assesses liquidity challenges of NFCs and their refinancing needs going forward. With the exception of Caceres et al (2020), these papers mostly focus on a sensitivity analysis with limited dynamics, and do not perform multi-year scenario-based simulations of balance sheets.…”

“…Debt at risk is defined as share of debt of firms below the required thresholds (either ICR below one or cash available below zero or solvency ratio below zero) out of total debt. Firm at risk is defined as share of number of firms below the required thresholds out of total number of firms.4 For example, while it may be optimal for individual firms to offset the impact of the shock by cutting costs and laying off workers, in the general equilibrium, such responses would cause an increase in employment and an additional decline in demand.5 An exception isCaceres et al (2020) which jointly simulates liquidity and solvency ratios of US firms. However,Caceres et al (2020) do not perform a triage of firms as we do for firms across 24 countries.6 Regressions pooling firms from various countries together also include country fixed effects.7 Stress testing models rely on parameters estimated econometrically.…”

Corporate Sector Resilience in India in the Wake of the COVID-19 Shock

“…Diez et al (2021) quantify the rise in solvency and liquidity risks among small and medium enterprises for advanced economies. Caceres et al (2020) assess the solvency risks and liquidity needs facing the U.S. corporate sector associated with the COVID-19 crisis. Bank of Japan (2020 and 2021) examined the liquidity impact of the COVID shock on the corporate sector in Japan, including the impact of policy measures and with a multi-year simulation.…”

The Financial Performance and Macrofinancial Implications of Large State-Owned Enterprises in Sub-Saharan Africa

“…E.g.,Baum et al, 2021;Tressel and Ding, 2021;Wezel and Synak, 2021;Caceres et al, 2020; Chow, 2015. 24 Benchmarks derived from quartile distributions of four financial indicators for about 22,000 SOEs worldwide.…”