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

By Carlos Caceres, Diego A. Cerdeiro, Dan Pan, Suchanan Tambunlertchai

November 13, 2020

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Carlos Caceres, Diego A. Cerdeiro, Dan Pan, and Suchanan Tambunlertchai. Stress Testing U.S. Leveraged Corporates in a COVID-19 World, (USA: International Monetary Fund, 2020) accessed December 26, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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.

Subject: Corporate sector, Currencies, Economic sectors, Financial institutions, Financial sector policy and analysis, Loans, Money, Stocks, Stress testing

Keywords: Amortization profile, Cash inflow, Corporate, Corporate sector, Currencies, Equity position metrics, Firm value, Global, Leverage, Leverage ratio, Liquidity, Liquidity need, Liquidity., Loans, Maturing bond debt, Maturing debt, Need Lt, Net equity position, Revenue flow, Revenue-to-assets ratio, Rollover needs, Solvency, Stocks, Stress testing, WP

Publication Details

Pages:

43
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2020/238
Stock No:

WPIEA2020238
ISBN:

9781513561134
ISSN:

1018-5941

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