## csvhlirea ## Source details **Canonical URL:** [csvhlirea](https://www.imf.org/-/media/files/publications/dp/2025/english/csvhlirea.pdf) ## Other formats - [Markdown version](/-/media/files/publications/dp/2025/english/csvhlirea.pdf.md) - [Structured JSON version](/-/media/files/publications/dp/2025/english/csvhlirea.pdf.json) --- ### Executive summary and overview - Nonfinancial corporations appeared to navigate the COVID-19 shock relatively well, helped by unprecedented policy support and resilient aggregate demand, but corporate vulnerabilities that predated the pandemic have resurfaced in a new environment of higher interest rates. - High interest rates, above prepandemic levels, are expected to persist even though several central banks have recently begun cutting rates. - The paper documents corporate-sector vulnerabilities, quantifies macrofinancial implications, and discusses policies to prevent and mitigate corporate-sector risks in a high-rate environment. ### Key findings and metrics - Rising corporate distress - Global default rates: 4.3 percent in 2022; 4.8 percent in 2023; 5 percent in January 2024. - Moody’s baseline expectation: default rates remain close to the historical average of about 4 percent if central banks cut rates in 2024. - Share of distressed firms estimated at almost 25 percent in 2022 and expected to have risen further in 2023; US share rose from roughly 15 percent in 2014 to over 25 percent in 2022. - Refinancing and cost-of-debt pressures - Global corporate refinancing needs in 2024 total more than $5 trillion, with approximately half accounted for by US companies. - Corporate financing costs (long-term risk-free rate plus corporate spread) across 40 countries in baseline: increase by 5.2 percent in the first year and 2.1 percent in the second year relative to 2023; decline by 1 percent in the third year. - Firms with high rollover needs (the “maturity wall”) and firms with large shares of variable-rate debt are particularly vulnerable. - Monetary policy tightening magnitudes (selected) - Federal Reserve: increase of 5.25 percentage points between March 2022 and July 2023. - Brazil, Chile, Colombia, Mexico: trough-to-peak raises of 11.75, 10.75, 11.50, and 7.25 percentage points, respectively (2021–2023). - Nonbank and market-based financing (scale and shifts) - Nonbanks’ assets: “over 47 percent of global financial assets in 2022” (compared with 43 percent in 2008). - Leveraged loans outstanding: “almost $9 trillion globally, of which $7 trillion was in AEs.” - High-yield bond market: “almost $4 trillion globally, of which $3 trillion was in AEs.” - Investment-grade bond outstanding: about “$21 trillion globally.” - Private credit outstanding: “over $1 trillion.” - Commercial real estate (CRE) - US CRE market size: $6 trillion. - US nonperforming CRE loan rate for banks by end-2023: 0.81 percent (up from 0.41 percent at end-2022). - Reported increases in nonperforming CRE loan rates by bank size: large banks +153 basis points; small banks +44 basis points; regional banks +49 basis points. - ECB corporate holdings and quantitative tightening (selected) - Eurosystem corporate sector holdings (stock) as of January 2024: €302.8 billion. - Estimated net redemptions: €7.4 billion for Q1 2024; estimated redemptions at €36 billion per year for 2024–25 and €48 billion per year for 2026–27. - Zombie firms and incidence - Using a sample of 63 countries since 2000, share of listed zombie firms approximately 9 percent in 2021; private-firm share above 6 percent in 2021. - Definition used: interest coverage ratio below one, leverage above the median in country–industry, and negative real sales growth for at least two consecutive years. - Crisis-preparedness indicator (insolvency) - Covers 60 countries representing more than 91 percent of global GDP and 84 percent of world population. - Composite maximum score: 100; five equally weighted subindicators (each weight 20): out-of-court debt restructuring, hybrid restructuring, reorganization, liquidation, institutional framework. ### Empirical evidence on transmission and stress tests - State-dependent monetary transmission - Interest rate increases transmit more strongly when the share of distressed firms is high; financially distressed firms suffer substantially larger declines in performance. - Distressed firms cut investment growth by 0.6 percentage point more than other firms two years after a 100 basis points increase in the one-year yield. - Baseline investment gap: distressed firms’ quarterly investment growth is, on average, 2.2 percentage points lower than other firms; the 0.6 percentage point shock widens the investment wedge by almost 30 percent. - Rollover risk amplification - Firms in the upper quartile of the share of long-term debt maturing in the following year experience larger falls in investment and debt and larger increases in the average cost of debt following contractionary shocks. - Adverse effects are compounded for firms that are both distressed and have high rollover needs. - Stress-test scenarios and outcomes - Baseline scenario: country forecasts from the October 2023 World Economic Outlook already entail increased nonfinancial corporations’ financing costs. - Adverse scenario: abrupt slowdown/recession in main regions (China, EU, US), monetary policy miscalibration, higher short- and long-term rates, higher risk premiums, asset price declines, sectoral shocks (including a 300 basis point decline in firms’ return on assets and a 20 percent additional decline in construction sector sales). - Scenario quantitative points: - During the first year of the adverse scenario, “the global economy contracts by 2 percent, with recessions across regions, including China.” - Default probabilities increase in both baseline and adverse scenarios; effects on bank capital buffers are significant and larger in Emerging Markets (EMs) and less developed banking systems. - Mapping to lenders: - In EMs, macroeconomic default risks over three years are more significant for bank loans than for corporate securities because most corporate financing is via bank loans. - In AEs, default risks tend to be more significant for corporate securities than for bank loans. - Caveats: cumulative flows of NPLs reported are an upper bound (do not account for recoveries or cures) and do not incorporate second-round effects or sovereign spillovers. ### Nonbank financial intermediation risks and data gaps - Nonbanks’ growing role - Nonbanks’ share of global financial assets rose from 43 percent in 2008 to “over 47 percent” in 2022. - Presence in syndicated loan market increased from 30 percent of originated loans in 2000 to almost 40 percent in 2022. - CLOs now purchase close to two-thirds of leveraged loan issuance; CLO investor tranches differ across banks, asset managers, and insurers. - Risks from migration of credit risk to nonbanks - Nonbanks have increased exposure to riskier and less productive firms, including zombie and nontradable firms. - Liquidity mismatches (for example, open-ended funds holding illiquid assets) and opacity and interconnections in private credit market may amplify transmission of stress. - Data and regulatory priorities - Data gaps prevent full identification of nonbank exposures to corporate vulnerabilities; fuzzy matching of syndicated loan deals to firm balance sheets covers only about half of Dealogic loan borrowers in the sample. - Recommendation: strengthen data collection on nonbank exposures and consider extending regulatory perimeter to relevant nonbank activities. ### Insolvency frameworks, crisis preparedness, and state as creditor - Pandemic experience and insolvency activity - Pandemic policy support reduced judicial insolvency cases even as many micro and small firms exited without judicial proceedings (US example: 3.3 million small businesses exited in first six months of 2020 out of 30 million; fewer than 1,000 cases of a new reorganization procedure for small businesses). - The “bankruptcy gap” refers to fewer judicial insolvencies than predicted by firm distress. - Crisis-preparedness indicator findings and gaps - Small variations between 2021 and 2023 vintages; some EU members improved via implementation of the EU Restructuring Directive. - Persistent shortcomings: out-of-court mechanisms absent in most countries; limited reforms improving liquidation regimes and regulation of insolvency professionals; resource constraints in courts. - Empirical link to monetary transmission - Healthy firms in countries with less developed insolvency frameworks are more negatively affected by contractionary monetary policy (larger falls in investment and debt, larger interest-rate increases) than healthy firms in countries with better-developed frameworks. - Policy-relevant institutional priorities - Maintain and improve all main tools: out-of-court debt restructuring, hybrid restructuring, reorganization, liquidation. - Augment court capacity, adopt out-of-court and hybrid options for speed and scalability, and collect granular data on procedure durations and recoveries. - Ensure state acts as an informed “private creditor” where public support increased state exposure: balance fiscal constraints, limit moral hazard, and preserve productive restructuring or liquidation. - Specific priorities for sectors: accelerated enforcement and full toolkit for CRE; improved legal and institutional frameworks for bond restructuring (trustees, bondholder meetings, creditor classes). ### Policy recommendations (priorities) - Financial supervision and macroprudential stance - Deploy stringent stress tests to identify where higher postpandemic rates threaten firms’ repayment capacity. - Strengthen supervision focused on sectors hit by the pandemic and monetary tightening (notably CRE). - Ensure stress tests embed large CRE price declines and review banks’ CRE valuation and provisioning assumptions. - Use micro- and macroprudential tools to mitigate systemic risks from excessive leverage and interconnectedness. - Nonbanks and data/regulation - Strengthen data collection on nonbank exposures (including balance-sheet data, leverage, liquidity mismatches, and interconnectedness with banks). - Consider extending the regulatory perimeter to material private credit and nonbank activities where exposures become systemically relevant. - Insolvency and restructuring reforms - Introduce or scale up out-of-court and hybrid restructuring mechanisms; improve liquidation regimes and regulation of insolvency professionals. - Foster development of distressed debt and NPL markets and create incentives for timely restructuring to avoid prolonged zombification. - Improve coordination and decision-making protocols where the state is a creditor and remove legal or regulatory impediments that delay restructuring. - Rollover and corporate liquidity monitoring - Monitor firms’ maturity walls and variable-rate exposures; prioritize supervisory attention to firms with large near-term rollover needs and weak cash buffers. - Require firms and financial institutions to assess hedging shortfalls and refinancing risks. ### Conclusion and implications for financial stability - The interaction of high corporate indebtedness with sustained higher interest rates is uncovering corporate vulnerabilities with potential to materially raise financial stability risks. - Financial stability risks would increase materially under a combined adverse scenario of negative demand shocks and higher interest rates, with pronounced effects in Emerging Markets and less developed banking systems through bank capital buffer declines. - Targeted financial policies, improved insolvency frameworks, and better coverage and supervision of nonbank credit intermediation are central to preventing and mitigating these risks. *Source: Corporate Sector Vulnerabilities and High Levels of Interest Rates (IMF Departmental Paper; excerpts and figures from csvhlirea).* ### Executive Summary.................................................................................................v ### Executive Summary ### Overview - Nonfinancial corporations in many jurisdictions appear to have navigated the COVID-19 pandemic shock relatively well, supported, in part, by an unprecedented policy reaction that mitigated the effect of aggregate shocks on corporations. - Corporations’ financial performance also seemed to have withstood the initial effects from the synchronized global monetary policy tightening cycle initiated in late 2021/early 2022 to get inflation back on target. - Although several central banks have recently started cutting interest rates, the expectation is that high interest rates, above prepandemic levels, are here to stay. - The paper provides a comprehensive overview of corporate sector vulnerabilities that have emerged since the pandemic, focusing on financial stability implications in a new environment of high interest rates. ### Key Findings - The global share of financially distressed firms has been trending upward, especially in emerging markets. - Evidence points to interest rate increases transmitting more strongly to the real economy when the share of distressed firms is high. - The lagged effects of past monetary policy tightening will lead to a significant increase in corporate financing rates going forward, with adverse effects on firms’ capacity to invest. - Firms with higher refinancing needs—the so-called maturity wall—may face more challenges in rolling over their debt in an environment of high interest rates. - Empirical analysis finds that the financial performance of nonfinancial corporations with high rollover needs tends to be more affected. - An adverse macroeconomic scenario of negative demand shocks, coupled with higher interest rates, would lead to a fast and large increase in corporate defaults. - Financial stability risks would increase materially, especially for emerging markets and less developed banking systems, because bank capital buffers would fall considerably in this scenario. - The increasing role of nonbanks in corporate credit intermediation in advanced economies may amplify overall financial stability risks. - Since the global financial crisis, nonbanks have been increasing their exposure to riskier firms and to the less productive segment of the economy, including zombie firms and nontradable firms. - The migration of credit risk to the unregulated sector raises concerns about the propagation of risks to the rest of the financial system from a potential corporate default cycle. - It is paramount to continue closing data gaps in this sector while extending the regulatory perimeter to nonbanks to improve the overall resilience of the financial sector. - Some progress on insolvency and restructuring regimes has been documented since the pandemic, but shortcomings persist. - Out-of-court mechanisms have not yet been introduced in most countries. - Reforms that improve the quality of liquidation regimes or the regulation of insolvency professionals remain limited. ### Financial Stability Risks and Scenarios - High corporate indebtedness interacting with a new environment of high interest rates is uncovering vulnerabilities in the corporate sector, posing risks to the ongoing global recovery. - The paper highlights that: - Interest rate increases transmit more strongly when the share of distressed firms is high. - Firms with high rollover needs are particularly vulnerable to higher financing costs and refinancing frictions. - A combined shock of negative demand and higher interest rates would rapidly increase corporate defaults and materially weaken bank capital buffers, with pronounced effects in emerging markets and less developed banking systems. ### Nonbank Financial Intermediation - Nonbanks have increased exposure to: - Riskier firms. - Less productive segments of the economy, including zombie firms and nontradable firms. - Risks identified: - Migration of credit risk into the unregulated sector could amplify systemic transmission from corporate defaults. - Data gaps on nonbank exposures need to be closed. - The regulatory perimeter should be extended to nonbanks to enhance financial sector resilience. ### Insolvency Frameworks and Crisis Preparedness - Documented progress on insolvency and restructuring since the pandemic, but important gaps remain: - Lack of widespread out-of-court debt restructuring mechanisms. - Limited improvements in liquidation regimes and regulation of insolvency professionals. - These shortcomings could prevent countries from resolving firms quickly in the event of intensifying corporate distress. ### Policy Implications and Recommendations - Design and deploy appropriate policies to prevent and mitigate corporate-sector risks in a high-rate environment. - Priorities include: - Strengthening data collection on nonbank exposures to corporate credit. - Considering extension of regulatory perimeter to cover relevant nonbank activities. - Enhancing insolvency and restructuring frameworks, including out-of-court mechanisms, liquidation quality, and insolvency professional regulation. - Monitoring and addressing rollover risks for firms facing large maturity walls. ### Conclusion - The interaction of high corporate indebtedness with sustained higher interest rates is revealing corporate-sector vulnerabilities with potential to materially raise financial stability risks. - Targeted financial policies, improved insolvency frameworks, and better coverage and supervision of nonbank credit intermediation are central to preventing and mitigating these risks. *Source: Executive Summary of "Corporate Sector Vulnerabilities and High Levels of Interest Rates" (IMF Departmental Paper).* ### 1. Introduction ### csvhlirea - 1. Introduction ### Overview - Nonfinancial corporations generally preserved balance‑sheet health during the COVID-19 pandemic, aided by unprecedented COVID-19–related governmental policy measures and resilient aggregate demand that supported strong corporate earnings. - Concerns about high corporate indebtedness and the sustainability of the global corporate debt cycle predated the pandemic and have become more prevalent since the pandemic, including increased media references to “corporate bankruptcy,” “corporate default,” “corporate distress,” “corporate debt,” or “corporate vulnerabilities.” - The paper analyzes corporate sector vulnerabilities in a postpandemic context of higher interest rates, quantifies macrofinancial implications, and discusses policies to prevent and mitigate risks from the corporate sector. ### Drivers of Corporate Sector Vulnerabilities - Elevated or persistently high corporate debt levels in many countries suggest higher underlying vulnerabilities. - Funding costs are expected to remain considerably higher relative to prepandemic levels amid high near‑term refinancing needs (the “maturity wall”). - Central banks pivoted from decades of extremely low interest rates and tightened policy in late 2021/early 2022; markets price that policy rates will remain considerably above prepandemic levels. - Cash buffers built during the pandemic are eroding; corporate margins are compressed, with a significant reduction in profits, and the debt share of firms with low cash buffers has increased over the past two years. - Tighter lending standards have pushed some firms, generally low rated and at higher default risk, toward more opaque funding sources, including the private credit market, where most investors are NBFIs subject to less stringent regulation. - Corporate defaults and bankruptcy filings have been increasing in many countries, particularly in the speculative grade and for leveraged loans. ### Main Findings (paper summary) - Temporary pandemic policy measures, combined with low interest rates, masked some prepandemic trends in corporate vulnerabilities; the interaction of elevated vulnerabilities with high interest rates as policy support is scaled back will test nonfinancial sector resilience. - Using nonfinancial firm–level balance sheet data for a panel of 48 countries, the paper finds substantially larger effects of contractionary monetary policy on financially distressed firms relative to other firms; transmission is state dependent and stronger when the share of distressed firms is high. - Firms with high rollover risks (from preexisting debt maturity structures) are more affected by contractionary monetary policy shocks, even controlling for firm‑specific balance sheet characteristics and fixed effects. - A corporate sector stress test across a large set of countries shows significant declines in bank capital buffers from an adverse scenario of negative aggregate demand shocks combined with further increases in the cost of debt, producing a large number of corporate defaults; financial stability risks are stronger for EMs and less developed banking systems. - Loan‑level and balance‑sheet evidence shows that since the global financial crisis nonbanks have increased exposure to riskier firms and less productive segments of the economy, including zombie firms and nontradable firms (such as real estate); nonbanks are likely to continue an increased role in corporate credit intermediation in a high interest‑rate environment. - An updated crisis preparedness indicator for 60 countries documents some progress in insolvency and restructuring frameworks since 2021 but persistent shortcomings, notably the lack of out‑of‑court mechanisms in most countries. - Empirical estimates indicate that healthy firms in countries with less developed insolvency frameworks tend to be more affected by monetary policy, consistent with the risk that prolonged survival of distressed firms (zombies) delays creative destruction and harms healthy firms via misallocation or crowding‑out effects. ### Empirical Evidence and Mechanisms - Monetary policy transmission is state dependent: interest rate increases transmit more strongly to the real economy when the share of distressed firms is high; financially distressed firms experience substantially larger declines in financial performance. - Financial performance of distressed firms falls considerably more than that of other firms during a banking crisis, implying nonlinear feedback effects between corporate vulnerabilities and financial sector troubles. - Firms that concentrated debt rollover needs in the near term (high rollover risk) face larger adverse effects from contractionary monetary policy, highlighting that debt structure matters beyond standard distress metrics. ### Stress Testing and Macrofinancial Implications - Corporate sector stress tests quantify creditor losses under adverse macroeconomic scenarios of negative demand shocks and higher debt costs, showing: - Significant decline in bank capital buffers in adverse scenarios. - Larger effects in emerging markets and less developed banking systems. - The interaction of postpandemic higher interest rates with reduced policy support could materially increase financial stability risks globally. ### Nonbank (NBFI) Exposures and Risks - Nonbanks have been increasing exposure to riskier and less productive firms, including zombie and nontradable firms. - High interest rates may encourage a shift in lending by nonbanks toward riskier corporate borrowers. - The shift from bank to nonbank corporate credit intermediation creates new financial stability challenges, especially in advanced economies (AEs), due to data gaps and less stringent regulation. ### Insolvency and Restructuring Frameworks - The crisis preparedness indicator update for 60 countries shows progress since 2021 but persistent shortcomings: - Out‑of‑court mechanisms have not been introduced in most countries, limiting fast resolution of distressed firms. - Reforms to improve liquidation regimes and regulation of insolvency professionals remain limited. - Some pandemic support measures (loan and guarantee programs) increased firms’ exposure to the state, raising restructuring and insolvency issues and creating a need for the state to act as a “private creditor” to limit moral hazard and fiscal costs. ### Policy Recommendations and Preventive Measures - Continue use of financial policies to prevent and mitigate corporate sector risk build‑up. - Deploy stringent stress tests to help supervisors identify where postpandemic higher interest rates most threaten firms’ repayment capacity. - Strengthen supervision focused on emerging risks in sectors hit hard by the pandemic and monetary tightening, including commercial real estate (CRE). - Gradually extend the regulatory perimeter to nonbanks and prioritize closing data gaps on nonbanks, including balance‑sheet data, leverage and liquidity mismatches, and nonbank interconnectedness with banks. - Improve crisis preparedness systems and insolvency frameworks, including adoption of out‑of‑court mechanisms and reforms to liquidation regimes and insolvency professional regulation. - Where states increased exposure through loan and guarantee programs, act as informed “private creditors” to make productivity‑preserving restructuring, reorganization, or liquidation decisions. ### Paper organization (brief) - Section 2 documents corporate sector vulnerabilities after the pandemic. - Section 3 contains two empirical exercises: (3.A) effect of higher interest rates on corporations’ financial performance; (3.B) assessment of potential effects on banks’ capital from adverse corporate default scenarios. - Section 4 examines bank and nonbank exposure to weak corporate borrowers. - Section 5 discusses progress on insolvency and restructuring regimes since 2021. - Section 6 presents policies to address corporate sector vulnerabilities. - Section 7 concludes the paper. *IMF DEPARTMENTAL PAPERS • Corporate Sector Vulnerabilities and High Levels of Interest Rates — 1. Introduction* ### 1. Global Large Firms: Sales 12-Month Trailing ### 1. Global Large Firms: Sales 12-Month Trailing ### Key findings and trends - Global default rates increased from 4.3 percent in 2022 to 4.8 percent in 2023, reaching 5 percent in January 2024. - According to Moody’s, global default rates are expected to remain close to the historical average of about 4 percent in the baseline scenario where central banks cut rates in 2024. - Corporate defaults and bankruptcy filings—particularly speculative grade and for leveraged loans—have been increasing in many jurisdictions. - Bankruptcy cases are higher than pre-COVID-19 levels in the euro area and Japan, while they remain lower in the United States. - Narrow corporate bond spreads have been attributed to technical factors such as limited bond issuance and robust duration demand, and to investor expectations of a soft landing and improved balance sheets due to pandemic policy support. - Capital markets have seen a decline in new bond and loan issuance, more pronounced for high-yield corporate bonds and leveraged loans. - Merger and acquisition deals volume slowed in 2023 compared with the 2021 boom. ### Risks and vulnerabilities highlighted - A prolonged war in Europe, newly emerged geopolitical risks in the Middle East, and higher commodity demand from green and artificial intelligence technologies could weigh on commodity and energy prices and worsen the corporate outlook. - A more fragmented world could further worsen the corporate outlook and exacerbate vulnerabilities in corporate credit quality. - Deterioration in credit fundamentals is already visible among segments of the weak tail of corporations despite no significant increase in NPLs or corporate defaults overall (attributed to pandemic policy support and large cash buffers). - Deteriorating corporate fundamentals will likely continue to erode corporate buffers globally, potentially bringing some firms to the trough of the credit cycle. - The amount of debt issued by “fallen angels” (issuers downgraded below investment grade) is now roughly equal to the amount of debt issued by “rising stars” (debt upgraded to investment grade). ### Corporate balance sheets and debt-servicing dynamics - US corporations have held financial assets exceeding total liabilities since 2021, notably interest-bearing assets. - Despite 525 basis points of rate hikes between March 2022 and July 2023 in the United States, default rates are increasing but remain low by historical standards; credit spreads are narrow and equity valuations are high. - Abundant interest-bearing assets have helped meaningfully lower net interest payments since 2022, contrary to the previous rate hike cycle when net interest payments increased substantially. - Liquidity buffers in corporate balance sheets have been gradually declining on an aggregated basis, dipping below the long-term average. - The share of firms with cash-to-interest-expense ratios below one (firms with weaker buffers) has increased over the past two years; SMEs are especially affected. - Global corporate refinancing needs in 2024 total more than $5 trillion, with approximately half accounted for by US companies. ### Market structure and funding channels - The corporate funding structure has shifted gradually from banks to nonbanks (NBFIs), raising financial stability concerns in a higher interest rate environment. - Direct financing through bond issuance and private credit markets has expanded, with NBFIs as main credit providers. - Since the global financial crisis, the presence of NBFIs in credit intermediation has increased amid more stringent bank regulations. ### Commercial real estate (CRE) and sectoral stresses - CRE prices have fallen dramatically during the recent interest rate hike cycle. - In the United States, the CRE market amounts to $6 trillion. - The nonperforming CRE loan rate for US banks by the end of 2023 doubled, reaching 0.81 percent from 0.41 percent at the end of 2022. - Reported increases in nonperforming CRE loan rates by bank size: large banks +153 basis points; small banks +44 basis points; regional banks +49 basis points. - Although the banking sector appears well capitalized on aggregate to absorb CRE losses, some jurisdictions could face painful losses given the large size and interconnectedness of the CRE sector. ### Indicators of market activity and issuance (summarized) - Decline in high-yield bonds, bank loans, and institutional/leveraged loan issuance noted (Figure references in source). - Mergers and acquisitions activity slowed in 2023 relative to 2021. - Nonfinancial corporate debt to GDP has increased over past decades, particularly in emerging markets. - Refinancing at current market yields increases average interest payments and deteriorates firms’ debt-servicing ability (Figure references in source). *Source: IMF DEPARTMENTAL PAPERS — Corporate Sector Vulnerabilities and High Levels of Interest Rates (figures and text excerpts from "1. Global Large Firms: Sales 12-Month Trailing" section).* ### 1. Global Firms’ Interest Coverage Ratio ### 1. Global Firms’ Interest Coverage Ratio ### Corporate sector vulnerabilities and funding structure - NBFIs—comprising investment funds, insurance companies, pension funds, and other financial intermediaries—have different business models, balance sheets, and governance structures and are subject to distinct regulatory frameworks within and across jurisdictions. - Nonbank funding is a valuable alternative to bank financing but significant vulnerabilities in the nonbank sector may interact with corporate sector fragilities, compounding financial stability risks. - Firms with a large share of variable-rate debt have been more vulnerable to a sudden increase in their cost of funding. - By size, SMEs are more dependent on bank loans and therefore have higher variable-rate shares. - Only roughly half the firms with variable-interest-rate debt in the euro area, the United Kingdom, and the United States tended to hedge interest rate risk over 2007–22 (Banerjee and others 2023). - There is an indication that interest rate hedging has been declining over time, increasing transmission of interest rate rises. ### Changes in firms’ cost of debt (key figures and samples) - Panel 1 sample: median cost of debt for nonfinancial corporations for a sample of 7,975 North American firms. - Panel 2 sample: median change of firms’ cost of debt between the second quarter of 2024 and the second quarter of 2021 for a sample of 49,988 firms. - Regional median changes in firms’ cost of debt between 2021:Q2 and 2024:Q2 (as shown in panel 2): - Africa/Middle East1.52.32.3 - Asia/Pacific0.70.91.1 - Europe1.11.72.1 - Latin America1.42.43.8 - North America0.41.12.0 - Variable rate debt percent of total debt, bucket: 3.0 1.3 2.6 4.3 2.6 ### Higher-for-longer interest-rate scenario and corporate balance-sheet dynamics - Firms with fixed-rate debt (often bond issuers) have been relatively shielded because funding cost increases when debt is rolled over or new issuance occurs. - Several bond-issuing firms front-loaded issuance during the pandemic (2020–21) to build precautionary cash buffers and lock in low rates. - Issuance in the high-yield segment plummeted during 2022–23; decline was most pronounced at lower ratings. - Firms issuing in 2022–23 did so with shorter maturities and a lower share of unsecured bonds. - Elevated amend-to-extend activity in the leveraged loan market indicates firms attempted to push back redemptions to defer funding needs and push back their maturity wall. - The leveraged loan market reflects a segment of more highly leveraged firms that typically access floating-rate syndicated loans. ### Monetary policy tightening magnitude (selected country and central bank moves) - The Federal Reserve increased its target range by 5.25 percentage points between March 2022 and July 2023. - Central banks of Brazil, Chile, Colombia, and Mexico raised their policy rate—trough to peak—by 11.75., 10.75, 11.50, and 7.25 percentage points, respectively, between 2021 and 2023. - Regional heterogeneity: the increase in cost of debt between 2021:Q2 and 2023:Q2 is most pronounced for Latin America; Asia/Pacific experienced a more limited increase reflecting slower and shorter tightening cycles in some countries. ### Market microstructure and issuance behavior (selected indicators) - US high-yield corporate bond issuance (Panel 3): issuance collapsed in 2022–23; share unsecured (right scale) fell (figure details in source). - Leveraged loan amend-to-extend volume (Panel 4): elevated activity across 2009–2024 indicating maturity extension behavior (figure details in source). ### Banking exposures and commercial real estate (CRE) - Historical CRE price trajectories and banking exposures to CRE-to-total-loans are shown across tightening cycles (figures in source). - Quarters of monetary policy tightening and country-level banking exposures (figure labels include: Cyprus, Malaysia, Korea, Latvia, Bulgaria, United States, Malta, Hungary, China, P.R.: Macao SAR, Japan, Germany, Sweden, Denmark, Australia, South Africa, Italy, United Kingdom, France, Spain, Luxembourg, Mexico, Ireland, Canada). ### Credit cycle measures and fallen angels / rising stars - Panel 2 (credit cycle based on corporate bond index returns) shows gap between total return of investment-grade corporate bond index and proxy return based on yield changes; negative gap indicates downturn in credit cycle (Panigirtzoglou 2023). - AE = advanced economies; CRE = commercial real estate; EM = emerging markets. ### Data sources - Sources cited: Bank of America; Bloomberg Finance L.P.; EUROPACE AG/Haver Analytics; JPMorgan; PitchBook Data, Inc.; S&P Capital IQ Pro; and IMF staff calculations. ### ECB quantitative tightening (Box 1 — key findings and figures) - ECB started quantitative tightening in July 2023 by discontinuing full reinvestments of asset purchase programs. - Corporate Sector Purchase Program (CSPP) launched early 2016 to support NFC financing and bank lending. - As of January 2024, stock of the Eurosystem corporate sector holdings amounted to €302.8 billion—assets purchase programs and pandemic emergency purchase programme. - Net redemptions estimated at €7.4 billion for the first quarter of 2024. - Market research estimates redemptions at €36 billion per year and €48 billion per year for 2024–25 and 2026–27, respectively. - ECB’s share in the euro area’s (EA-19) investment-grade bond outstanding balance declined from 25.3 percent at its 2022 peak to 17.2 percent in 2023. - Event study results: - April 2016 announcement brought down spreads by 10 basis points (eligible bonds). - December 2022 withdrawal announcement seemed to have caused a widening in spreads by 13 basis points. - The average change in spreads in the 30 days prior to the withdrawal announcement in December 2022 was about 30 basis points. - Event windows tracked: 30 days before and after announcement and implementation dates for launch (2016) and withdrawal (2022–23). - Regression analysis finds a positive and statistically significant relationship between investment-grade corporate spreads and interest rates, probability of recession, and US investment-grade corporate spreads. ### Zombie firms — incidence, consequences, and policy implications (Box 2 — key findings) - Zombie firms: unviable and unproductive firms that avoid default through continued support (bank lending, investor or government support). - Historical episodes: Japan’s lost decade (1980s) and some European countries during the European sovereign debt crisis (2010s) featured zombie lending and evergreening. - Congestion effects from zombie firms reduce productivity and growth: competition for inputs, lower market prices for healthy firms, and higher market wages relative to productivity. - Global trends: - Using a sample of 63 countries since 2000, Albuquerque and Iyer (2024) find share of listed zombie firms roughly 9 percent of all listed firms in 2021. - Updated zombie share for 2022 shows zombification declined slightly in 2022 but remained at very high levels. - Share of private firms stood at above 6 percent in 2021. - Determinants and prevalence: - Zombification more prevalent where macroprudential policy stance is looser, insolvency frameworks are less prepared, GDP growth is weaker, and interest rates are lower. - More prevalent in nontradable sectors: real estate, energy, information technology, materials, consumer discretionary. - Interaction with rising interest rates: - Albuquerque and Mao (2023) find negative spillovers from zombie prevalence to aggregate productivity growth may be amplified when interest rates increase because banks may preferentially ease credit to zombie firms to prevent defaults (evergreening), especially where banks are undercapitalized or insolvency regimes deficient. - Definition used by Albuquerque and Iyer (2024): - Zombie firms have an interest coverage ratio below one, their leverage ratio is above the median firm in the same country and industry, and they have experienced negative real sales growth. - These indicators must persist for at least two consecutive years to reduce misclassification from cyclical fluctuations. - Policy recommendations to address zombification: - Limit banks’ incentives to engage in zombie lending by making it harder to window-dress balance sheets. - Tighter bank supervision and regulation, bank recapitalizations, and enhanced and regular stress-testing exercises have been effective. - Strengthening banking sector health may not be sufficient if insolvency frameworks are deficient; improving insolvency frameworks and reducing costs of restructuring are necessary complements. *Source: csvhlirea - 1. Global Firms’ Interest Coverage Ratio (IMF Departmental Papers — Corporate Sector Vulnerabilities and High Levels of Interest Rates).* ### 3. Assessment of Financial Stability Risks ### 3. Assessment of Financial Stability Risks ### A. Transmission of Monetary Policy to Corporate Balance Sheets - Sample and identification - Microlevel balance sheet data for listed firms for 48 countries (23 EMs and 25 AEs), from the first quarter of 2000 to the fourth quarter of 2019. - Country-specific monetary policy shocks sourced from Albuquerque and Mao (2023); shocks calibrated to increase the country-specific one-year sovereign bond yield by 100 basis points. - Empirical method: local projection methods (Jordà 2005); responses shown up to 20 quarters ahead. - Controls: firm fixed effects, firm-specific characteristics (firm size, debt, liquid assets), and time-varying country–industry-specific shocks. - Definition of financially distressed firms and rollover-risk firms - Distressed firms: firms in the upper quartile of the historical country-specific probability of default distribution (probability of default is a modified Merton distance-to-default indicator from the National University of Singapore’s Credit Research Initiative); definition is time varying. - Firms with high rollover risk: firms in the upper quartile of the share of long-term debt maturing in the following year for each country-year pair. - Trends in distressed firms - The share of distressed firms is estimated to have increased globally over the past few years, with a slightly higher share for EMs relative to AEs. - The share of distressed firms, at almost 25 percent, in 2022 is already above 2019 levels and is expected to have risen further in 2023. - US-specific: the share of distressed firms increased from roughly 15 percent in 2014 to over 25 percent in 2022. - Differential transmission to distressed firms - Investment (physical and intangible): distressed firms cut investment growth by 0.6 percentage point more than other firms after two years following a 100 basis points increase in the one-year yield. - Baseline investment gap: distressed firms’ quarterly investment growth over the sample is, on average, 2.2 percentage points lower than that of other firms; the 0.6 percentage point shock effect widens the investment wedge by almost 30 percent. - Credit conditions and cost of debt: distressed firms experience larger reductions in total debt and a higher implicit interest rate (interest expenses divided by total debt) following contractionary shocks. - Default risk dynamics: distressed firms show a persistent increase in the probability of default over the following 12 months relative to other firms after a contractionary monetary policy shock. - State dependence: the transmission of monetary policy is state dependent—interest rate increases transmit more strongly to the real economy when the share of distressed firms is high. - Amplification during banking crises - When contractionary monetary policy coincides with a banking crisis (Laeven and Valencia 2020), distressed firms’ financial performance is significantly more hampered. - Effects are reported over horizons h = 4, h = 8, and h = 12 quarters ahead; coefficients significant at the 90 percent confidence level are highlighted. - The pattern underscores nonlinear amplification of corporate vulnerabilities during periods of heightened financial turmoil in the banking system. - Rollover risks - Firms with greater upcoming rollover needs (upper quartile of share of long-term debt maturing in the following year) experience larger falls in investment and debt, and a larger increase in the average cost of debt, after a monetary policy tightening. - The adverse effect is compounded for firms that are both distressed and have high rollover needs. - Implication: assessing corporate vulnerabilities requires multiple dimensions beyond balance-sheet distress, including debt maturity structure and upcoming refinancing needs. ### B. Assessment of Losses to Creditors from Corporate Sector Distress - Stress-test model and sample - Modeling approach builds on the dynamically consistent scenario-based corporate stress tests described in Tressel and Ding (2021). - The model assesses effects on nonfinancial corporations’ liquidity and debt servicing capacity arising from shocks to demand and interest rates. - Expanded data coverage: balance sheet data and financial statements for the year 2022 for roughly 23,000 nonfinancial firms covering 40 countries (25 AEs and 15 EMs), expanded from 24 countries in the original paper. - Scenarios and purpose - Scenarios consider risks identified in the October 2023 Global Financial Stability Report and are akin to stressed scenarios included on global banking vulnerabilities. - Objective: quantify potential losses to creditors under stressed macroeconomic scenarios driven by demand and interest-rate shocks, taking into account firms’ 2022 balance sheets and projected refinancing needs. *Source: csvhlirea - 3. Assessment of Financial Stability Risks* ### Chapter 2). Modeling of the globally consistent stress scenarios is in line with those being developed f ### Chapter 2). Modeling of the globally consistent stress scenarios is in line with those being developed for ### Stress scenario design and baseline - Baseline scenario sourced from country forecasts published in the October 2023 World Economic Outlook (IMF 2023a), which “already entails an increase in nonfinancial corporations’ financing costs.” - On average, across the 40 countries, corporate financing costs—computed as long-term risk-free rate plus corporate spread—“increase by 5.2 percent in the first year and 2.1 percent in the second year of the scenario, relative to 2023. In the third year, they decline by 1 percent, reflecting a decline in both risk-free rate and spreads.” - Adverse scenario components: - Abrupt slowdown/recession in main countries/regions (China, the European Union, the United States). - Monetary policy miscalibration and de-anchoring of inflation expectations, leading to further increases in short- and long-term interest rates, increases in risk premiums, and declines in asset market prices. - Additional shocks in the first year to sectors exposed to real estate, to account for a potential downturn in housing prices, including in the CRE market. - Additional sectoral shocks including a 300 basis point decline in firms’ return on assets and a 20 percent additional decline in the sales of construction sector firms, in addition to the macroeconomic scenario. - Policy reaction in China is included to counter asset market declines and support the economy. - During the first year of the adverse scenario, “the global economy contracts by 2 percent, with recessions across regions, including China.” ### Scenario assumptions for macro variables - Figures illustrate assumed paths for: - Global Real GDP (2021 = 100) under 2023 GFSR baseline and adverse. - Global Short-Term Interest Rate (Percent) under 2023 GFSR baseline and adverse. - Note: Scenario consistent with Global Financial Stability Report scenarios (IMF 2023b, Chapter 2). ### Firm-level vulnerability indicators and projections - Indicators used: Interest Coverage Ratio (ICR) and cash buffers (cash and equivalent plus receivables minus short-term liabilities, excluding short-term debt and current portion of long-term debt). - ICR metric: “ICR below one indicates that a firm cannot service its current debt only out of current profits.” - Cash buffers: negative cash buffers indicate liquidity concerns; projections computed under assumption of a constant stock of debt (firms incur new debt only to repay existing debt maturing). - Scenario simulation findings: - Vulnerability indicators—based on either ICRs below one or negative cash buffers—“deteriorate over the horizon, especially under the adverse scenario.” - Deterioration is broad-based across Advanced Economies (AEs) and Emerging Markets (EMs), particularly noticeable in the initial years of the scenario. - Some improvement occurs in the past year of the scenario as economies recover from real GDP decline and interest rates start declining. - Sectors most affected on average: construction, energy, communication, and agriculture. ### Mapping vulnerabilities to default probabilities and macro estimates - Methodology maps firm-level vulnerability indicators into proxies for annual default probabilities, aggregated at country level using each firm’s total debt as weights. - Two benchmarked sets of default probabilities: - Benchmark 1: 2022 anchored to actual (or estimated based on NPL ratios) default probabilities on loans by the banking system of each country. - Benchmark 2: 2022 anchored to mean expected default frequencies from Moody’s KMV, used as proxy for default risk faced by holders of nonfinancial corporate bonds; aggregate corporate bond exposures from OECD. - Key quantitative outcomes and observations: - Default probabilities increase both in the baseline and especially under the adverse scenario, for both AEs and EMs. - Under extrapolation to all nonfinancial corporations in each country: 1. “The macroeconomic effect of defaulted exposures (over three years) remains, on average, broadly manageable in percent of GDP, for both AEs and EMs, and for bank loans and corporate debt securities.” 2. In EMs, macroeconomic default risks on average are more significant for bank loans than for corporate securities because initial credit risk in the banking system is higher and most corporate financing is channeled through bank loans. 3. In AEs, macroeconomic default risks are more significant for corporate securities than for bank loans because initial expected default risk tends, on average, to be higher for securities than for loans. 4. Given higher loan default probabilities in EMs than in AEs, gross inflows of defaulted loans account for a significant share of aggregate bank capital in EMs and could potentially cause financial stability risks. - Figures illustrate: - Emerging Markets: PDs on Bank Loans (Percent) rising over Y0–Y3 under baseline and adverse. - Advanced Economies: PDs on Bank Loans (Percent) rising, with lower magnitudes than EMs. - Emerging Markets and Advanced Economies: Mean EDF on Debt Securities (Percent) rising Y0–Y3. - Value of exposures defaulting over three years (Adverse Scenario) shown as Percent of GDP for Loans and Bonds, AE and EM. - Value of loans defaulting (Adverse Scenario) shown as Percent of Tier 1 capital; panels indicate potentially sizable shares in EMs. - Caveats: - These are cumulative flows of NPLs, not accounting for recovery rates and cures; they constitute an upper bound on effect on banks’ capital. - Analysis does not assess potential second-round effects (for example, deleveraging by banks) or spillovers to sovereign from banking sector stress. - Scenario projections assume constant stock of debt; negative projected cash buffers imply need for increased borrowing. ### The rise of nonbank financials (NBFIs) in corporate credit intermediation - Nonbanks’ global share of financial assets: - Nonbanks’ assets represented “over 47 percent of global financial assets in 2022, when compared with 43 percent in 2008 (FSB 2023).” - Market-based debt and syndication trends: - Market-based debt has become an increasingly important financing source for nonfinancial firms. - Presence of nonbanks in global syndicated loan market increased from 30 percent of all originated loans in 2000 to almost 40 percent in 2022. - Some EMs (for example, Brazil) have increasingly relied on nonbank loans, though most corporations using syndicated loans are from AEs. - Risky credit and private credit markets: - Risky credit markets (high-yield bonds and leveraged loans) have grown rapidly; NBFIs (pension funds, insurance companies, mutual funds, ETFs) are important players in these markets, especially in AEs. - Private credit outstanding has reached “over $1 trillion” and rivals the leveraged loan market. - Global leveraged loans outstanding grew through end-2023, reaching “almost $9 trillion globally, of which $7 trillion was in AEs.” - High-yield bond market climbed to “almost $4 trillion globally, of which $3 trillion was in AEs.” - Investment-grade bond outstanding amount has grown to about “$21 trillion globally.” - Implications for financial stability: - Broadening of investor base beyond banks has distributed corporate credit exposures to a wider set of creditors, particularly NBFIs, with varying risk profiles. - This has likely reduced some risks to the banking system but increased complexity and opacity of credit markets, potentially introducing new risks and shock transmission channels. - In the US corporate debt market: - Pension funds and insurance companies are key in investment-grade and high-yield corporate bond markets. - Mutual funds and ETFs account for a large share of corporate bond holdings. - Investment funds and ETFs account for about half the demand in high-yield bonds. - CLOs now purchase close to two-thirds of total issuance of leveraged loans (compared with a bit less than half in 2006). - Concerns noted about liquidity mismatches for open-ended investment funds offering daily redemption while holding relatively illiquid instruments. - Interconnectedness and opacity in private credit amplify potential for capital calls, losses, and transmission of stress among NBFIs. *IMF DEPARTMENTAL PAPERS • Corporate Sector Vulnerabilities and High Levels of Interest Rates* ### 1. US Investment-Grade Bond Investor Base ### 1. US Investment-Grade Bond Investor Base ### Nonbank versus bank intermediation and investor risk-taking - In the US market, banks are exposed to CLOs primarily through AAA tranches, whereas asset managers and insurance companies invest more in the riskiest tranches. - Investors in CLO equity and mezzanine debt tranches are a more diverse group, comprising hedge funds and other structured credit funds. - The increasing shift from bank to nonbank credit intermediation to nonfinancial corporations creates new challenges for financial stability: - Nonbanks tend to exhibit greater vulnerabilities, including mismatches related to liquidity. - Nonbanks are subject to less robust regulatory and supervisory scrutiny than banks and cannot access central bank liquidity facilities, especially during periods of large financial shocks (IMF 2023c). - Nonbank lending is substantially more procyclical than bank lending: nonbanks cut lending by more than banks during periods of large shocks (Fleckenstein and others 2021; Aldasoro, Doerr, and Zhou 2023; Albuquerque and Becker 2024). - More stringent regulatory constraints on bank lending tend to push smaller and more financially vulnerable firms to borrow from nonbanks and at less favorable credit terms (Chernenko, Erel, and Prilmeier 2022). ### Interest-rate environment and credit shifts - High interest rates typically lead to a leakage of bank credit supply to the nonbanking sector: - Funding friction and the widening spread between the policy rate and the deposit rate lead to deposits flowing out of the banking sector (Drechsler, Savov, and Schnabl 2017; Nelson, Pinter, and Theodoridis 2018; Xiao 2020; Elliott and others 2021; Cucic and Gorea 2022; Elliott, Meisenzah, and Peydró 2023). - High interest rates have been found to promote a shift in mortgage and consumer lending away from traditional banks toward the more fragile and less supervised nonbanking sector (Den Haan and Sterk 2011; Drechsler, Savov, and Schnabl 2022). - The current environment of high interest rates—despite recent cuts in the policy rate by several central banks—coupled with signs of increasing distress in the nonfinancial corporate sector, may fuel a negative feedback loop between corporations and nonbanks that could spread to the rest of the financial sector. ### Data gaps and measurement - Data gaps have so far prevented a complete identification of the exposure of nonbanks (and banks) to corporate sector vulnerabilities. - The section combines syndicated loan deals from Dealogic with nonfinancial listed firms’ balance sheet data from Compustat using a fuzzy match based on borrower’s name, country, and industry; this leads to imperfect matching, covering about half the firms with loans in Dealogic. ### Key statistic - The value of the combined envelope of the guarantee programs for seven large economies was over $4 trillion (Hong and Lucas 2023). *Source: csvhlirea - 1. US Investment-Grade Bond Investor Base (excerpt).* ### Exposure trends and risk concentration - Banks and nonbanks have increased exposure to riskier firms since the global financial crisis, with rising lending to speculative-rated firms and to BBB-rated firms. - Both banks and nonbanks have been lending more to less productive segments of the economy (zombie firms), although the shares appear to have stabilized more recently. - High levels of capital in the banking sector in several jurisdictions constitute an important buffer, but questions remain about the resilience of the nonbank financial sector should corporate vulnerabilities materialize. ### Definition (zombies) - Zombies are defined as firms with an interest coverage ratio below one, leverage ratio above the median firm in the same country and industry, and with negative real sales growth; these indicators need to persist for at least two consecutive years to minimize misclassification from cyclical fluctuations. ### Sectoral composition concerns - Increasing exposure of banks and nonbanks to the nontradable sector is a concern because firms in this sector are typically less productive, more leveraged, and financially vulnerable and more prone to credit-fueled booms. - Lending to the nontradable sector has picked up noticeably since 2015, particularly from nonbanks. - Lending trends to the real estate and construction sector, including real estate investment trusts, are particularly concerning: although total lending to the real estate sector remains relatively small, it has been gradually increasing. - Risks to lenders from exposure to the nontradable sector may be mitigated if lenders are more exposed to the services sector, which saw a swift postpandemic recovery in the United States. ### 2. Insolvency Frameworks and Crisis Preparedness ### Pandemic effects and insolvency activity - During the pandemic there were concerns about a “tsunami” of insolvencies; instead, insolvency activity decreased in many countries due to multipronged policy support (grants, subsidized loans, guarantee programs, loan moratoria). - The transfer of losses from enterprises to the state was substantial; guarantee programs were deployed at unprecedented amounts. - The lack of a wave of judicial insolvencies does not reflect the full extent of firm exits: many micro and small enterprises exited the market without judicial insolvency proceedings. - In the United States, in the first six months of the pandemic in 2020, 3.3 million small businesses exited the market, out of 30 million small businesses; at the same time, there were fewer than 1,000 cases of the new judicial procedure for small businesses’ reorganization. - In China, 3,908 firms were liquidated through judicial insolvency proceedings, whereas 2.9 million firms exited the market. - The “COVID-19 paradox”: insolvency activity decreased during the pandemic even as firms suffered, creating a potential “bankruptcy gap” between predicted bankruptcy rates and actual bankruptcies (Banerjee, Noss, and Vidal Pastor 2021). - Insolvency activity is back to prepandemic levels in many countries, with noticeable increases in countries such as Canada, Japan, Sweden, the United Kingdom, and the United States. ### Role and effects of insolvency regimes - Insolvency and restructuring systems are crucial when companies face elevated debt pressure from higher interest rates: - An effective insolvency regime facilitates access to credit by firms. - Treatment of entrepreneurs in insolvency affects economic dynamism. - Quality insolvency regimes matter for both liquidation of unviable firms and preservation of firms that can return to viability, minimizing losses to creditors and the economy. ### Crisis preparedness indicator (60 countries) - The crisis preparedness indicator assesses insolvency and restructuring regimes of 60 countries representing more than 91 percent of global GDP and 84 percent of world population. - The indicator is based on laws and regulations in force at the time of assessment and focuses on aspects most relevant in a corporate debt crisis; it also serves as a proxy for overall insolvency regime quality in noncrisis situations. - The 2023 indicator shows small variations relative to the 2021 indicator, reflecting the time required to implement meaningful insolvency reforms. - Improvements noted: - Some countries registered improvements due to implementation of the EU Restructuring Directive (Belgium, Italy, Spain, Sweden). - Other countries implemented broad reforms (Nigeria) or specific institutional improvements (Philippines, United Arab Emirates). ### Policy priorities by country grouping - Advanced economies (AEs): - Generally higher quality insolvency frameworks applied by strong institutions. - Priorities: simplify liquidation proceedings; adjust technical aspects of reorganization (including for small enterprises); make better use of out-of-court restructuring; continue adopting modern technologies in insolvency proceedings; create a legal environment more conducive to restructuring. - Emerging markets (EMs): - Improvements in insolvency legislation noted; priority should be to strengthen the court system and insolvency administration. - Low-income countries: - Face important challenges in institutional frameworks and operation of insolvency laws; improvements in out-of-court restructuring and hybrid restructuring would increase crisis preparedness faster. ### Hybrid and out-of-court restructuring - Hybrid restructuring: out-of-court debt restructuring assisted by limited judicial intervention (for example, to support a stay of creditor actions or to confirm a restructuring agreement). - Hybrid and out-of-court methods were recommended during the pandemic as faster means to support enterprises where full legal reform would take longer. *Source: csvhlirea - 1. US Investment-Grade Bond Investor Base (excerpt).* ### 1. Advanced Economies2. Emerging Markets ### 1. Advanced Economies2. Emerging Markets ### Crisis preparedness and nonperforming loans (NPLs) - The crisis preparedness indicator is visualized with subindicator axes labeled "Out-of-court", "Hybrid", "Reorganization", "Liquidation", "Institutions" and quartiles shown as "25th percentile", "Median", "75th percentile". - Axis tick values shown in figures: "5", "10", "15", "20" and secondary axis values "0", "020406080". - Note: "The further away from the center, the higher the value of the subindicator, and therefore, the level of crisis preparedness is higher." Dotted lines show the lower and upper quartile, and colored lines give the median. - Country group labels in figures: "AE = advanced economies; EM = emerging market; LIC = low-income country." - The levels of crisis preparedness correlate with the overall quality of the insolvency and restructuring framework. High levels of NPLs combined with low crisis preparedness indicate a country will probably spend more time bringing down NPL levels and would fare worse in the case of a crisis. - Figures presented: "Figure 23. Levels of Nonperforming Loans and Crisis Preparedness, 2023" and "Figure 24. Levels of Nonperforming Loans and Crisis Preparedness, 2021." Data labels use ISO country codes and sources are "IMF, Financial Soundness Indicators database; and authors’ calculations." ### Main developments in crisis preparedness since 2021 - Increased adoption of hybrid restructuring techniques: - Several countries, particularly EU countries, improved hybrid restructuring techniques. - The 2019 Restructuring Directive allowed EU members to revisit insolvency and restructuring regimes; implementation options created diversity in restructuring and reorganization tools (citing Garrido and others 2021). - Examples of adoption paths: Latvia and Sweden incorporated the directive as a revision of reorganization frameworks; Greece included a restructuring procedure and abolished reorganization; Spain revised restructuring procedures without corresponding reorganization modifications. - There is "wide scope for the adoption of flexible restructuring techniques in several economies (Andre and Demmou 2022)." - Sale of enterprises as a going concern: - Some countries adopt measures to facilitate sale of enterprises as a going concern, via ordinary liquidation or accelerated insolvency "prepack" procedures (noted especially in the United Kingdom). - Use of technology: - Adoption accelerated during the pandemic: case management, virtual hearings, virtual creditor meetings. - Immediate technological deployments: e-auctions and portals for asset sales in insolvency and debt enforcement. - Potential innovations: artificial intelligence systems for courts, early warning systems to detect enterprise financial stress, consolidated databases for claims and assets identification. - Court specialization: - Specialization in insolvency law or commercial/corporate matters raises regime quality. - Example: Nigeria recently established courts or judges specialized in insolvency law and commercial matters. - Persistent shortcomings and slippages: - Out-of-court mechanisms remain absent in most countries. - Reforms improving liquidation regimes or regulation of insolvency professionals are sparse. - Some countries experienced slippages: Korea let lapse its out-of-court corporate restructuring regime; Colombia’s special hybrid procedures introduced during the pandemic have expired. - Lack of resources in courts handling insolvency cases is relevant in several countries (examples: India and Spain). ### Insolvency frameworks and effects of monetary policy - Objective: test how monetary policy tightening affects healthy firms conditional on country-level crisis preparedness. - Country sorting: Countries in the first quartile of the crisis preparedness indicator are labeled "less developed insolvency frameworks"; remaining countries are "well-developed insolvency frameworks." - Footnote: Countries with less developed insolvency frameworks in the regression analysis include "Egypt, Indonesia, Jordan, Mexico, Nigeria, Pakistan, Russia, Saudi Arabia, Türkiye, and Vietnam." - Main empirical result: - Healthy firms in countries with less-developed insolvency regimes are more affected by contractionary monetary policy: investment and debt fall substantially more, and interest rates increase more, compared with healthy firms in countries with more developed insolvency regimes. - Figure details (Figure 25): - Shows cumulative impulse responses for healthy firms (below the upper quartile of the country-specific probability of default distribution) to a monetary policy shock that increases the country-specific one-year sovereign bond yield by "100 basis points." - Outcome panels: "1. Investment Growth", "2. Intangible Investment Growth", "3. Debt Growth", "4. Interest Rate". - Horizons on x-axis: "h = 4", "h = 8", "h = 12" (quarters). - Color coding: red bars = effects for countries with less developed insolvency frameworks (first quartile); green bars = remaining countries. - Statistical notation: full bars = statistically significant coefficients at the "90 percent" confidence level; hollow bars = statistically insignificant coefficients. - Example values shown on panels: Investment Growth axis includes "–2.0", "–1.5", "–1.0", "–0.5", "0.0" and a labeled value "–1.4"; Intangible Investment Growth axis includes "–1.4", "–1.2", "–1.0", "–0.8", "–0.6", "–0.4", "–0.2", "0.0" and a labeled value "–1.2"; Debt Growth axis includes "–2.5", "–2.0", "–1.5", "–1.0", "–0.5", "0.0" and Interest Rate axis includes "–0.3", "–0.2", "–0.1", "0.0", "0.1", "0.2", "0.3", "0.4". - Interpretation: - Findings align with the view that deficient insolvency frameworks hinder efficient resolution of distressed firms (costly, slow, low recovery), producing misallocation of capital or crowding-out effects that harm healthy firms. - Poor insolvency frameworks can prolong the life of distressed firms, potentially creating "zombie firms" and delaying creative destruction. ### Needed policies — The Role of Financial Policies - Corporate sector vulnerabilities can pose systemic risks, amplified by high interest rates, tighter credit conditions, and economic uncertainty. - Key threats to macrofinancial stability: excessive leverage; interconnectedness with financial and nonfinancial institutions; risk of asset price bubbles; higher credit risk. - Policy recommendations and supervisory actions: - Deploy both micro- and macroprudential tools to mitigate risks. - Require stringent stress tests to estimate potential effects of rising interest rates on firms’ repayment capacity amid eroding buffers. - Financial supervisors should monitor vulnerabilities in sectors hit hard by the pandemic and the monetary tightening cycle; special attention to CRE (commercial real estate) prospects. - Stress-testing exercises should embed large CRE price declines to inform adequacy of capital buffers for CRE exposures. - Supervisors should review banks’ CRE valuation assumptions and ensure provisions are adequate. - As lending standards tighten, the role of nonbank financials in corporate credit has increased substantially; authorities need sufficient and reliable data to analyze vulnerabilities from origination practices and intermediation chains. - Consider a more proactive supervisory and regulatory approach to private credit where private credit markets or exposures are becoming material (reference to IMF 2024c). - Insolvency and restructuring in policy mix: - Financial policies must account for the necessity of corporate debt restructuring and insolvency. - During the pandemic, support to enterprises was unprecedented; debate exists on bailouts versus insolvency/restructuring approaches. - Orthodox view: bankruptcy/insolvency systems help insulate or rescue domestic financial systems, especially banking. - Policy advice: progressively reduce broad support measures and replace with firm-specific support for viable firms facing liquidity or solvency risks (references: IMF 2021; Araujo and others 2022). - Once broad support is removed, pursue financial and operational restructuring: assertive supervision of financial creditors, workout units, resolution targets, improvements to insolvency and restructuring regimes, and development of distressed debt and NPL markets to reduce corporate restructuring costs. ### Needed policies — Restructuring and insolvency - Current stress is driven by high corporate debt, increasing interest rates, and inflationary pressures (financial restructuring may address), while technological transformation and industrial policy shifts require operational restructuring or liquidation. - Risks of zombification require both strong supervisory action and functional insolvency regimes that process liquidation of zombie firms. - Recommended reforms and actions: - Continue improvements to insolvency and restructuring regimes. - Augment court capacity with out-of-court restructuring and hybrid restructuring alternatives that combine informal negotiation flexibility with limited judicial intervention to protect assets and bind dissenting creditors. - Use judicial reorganization for complex cases requiring operational restructuring. - Ensure liquidation of unviable firms to remove noncompetitive and zombie enterprises and promote better allocation of economic and fiscal resources. - Maintain all main tools in the framework (out-of-court debt restructuring, hybrid restructuring, reorganization, liquidation) because they perform distinct and complementary functions; availability is important regardless of relative use. - Foster development of a restructuring culture among economic actors to increase intensive use of legal techniques. - Introduce data-gathering systems to collect variables such as duration of proceedings (and of each procedural step) and actual recovery of claims, which are main variables for assessing insolvency efficiency (reference: Garrido and others 2019). - Acknowledge that unattractiveness of insolvency proceedings contributes to zombification: proceedings are often opened too late due to perceived inefficiency and high costs; lax enforcement of directors’ duties contributes to survival of zombie firms. - Sector- and country-specific risks warrant distinct restructuring and insolvency responses. Highlighted sectors and issues: - Commercial real estate (CRE): - Sector shows distress in numerous countries; resolving distress requires a functioning mortgage enforcement regime and a full toolkit of restructuring and insolvency options. - Introducing accelerated enforcement for CRE can help address sector crises. - Bond restructuring: - NBFIs often finance via bonds; bond restructuring raises issues including the role of trustees, bondholders’ meetings, and integration of bondholders as a class in insolvency proceedings. - Role of the state as a creditor: - Pandemic legacy increased state role as creditor in restructuring and insolvency. - States need to deploy resources and adopt approaches similar to private creditors, consistent with preserving a market economy, avoiding continuation of zombie enterprises, and making economically justifiable decisions. - Priority status of public claims (particularly tax and social security claims) may complicate restructuring (reference: Aw, Crowley, and Garrido, forthcoming). *Source: Authors’ calculations; data from IMF, Financial Soundness Indicators database, and authors’ calculations.* ### 7. Conclusion ### 7. Conclusion ### Main findings - Recent monetary policy tightening, coupled with the withdrawal of policy support deployed during the pandemic, may translate into liquidity and solvency difficulties for many corporations, which ultimately will affect lenders. - A postpandemic higher cost of funding for several corporations is uncovering vulnerabilities in some sectors of the economy. - These vulnerabilities may be exacerbated by worsening credit quality in corporate loans that ultimately may affect the health of the financial sector. - Corporate debt vulnerabilities will continue to weigh on the outlook for global financial stability as firms face pressures from higher and volatile interest rates, higher input costs, weakening economic activity, and tighter bank and nonbank lending standards. - Although there has been important progress on insolvency and restructuring regimes since the pandemic, shortcomings persist: - Out-of-court mechanisms have not been introduced in most countries. - Reforms that improve the quality of liquidation regimes, or the regulation of insolvency professionals, remain limited. ### Implications for financial stability and policy questions - How systemic the deterioration in corporate credit will be, which lenders may be affected, and how to manage this risk remain important policy questions. - Countries need to continue improving their crisis preparedness systems to deal with a potential scenario of an intensification of corporate distress. ### Policy recommendations and priorities (implied by conclusions) - Strengthen crisis preparedness systems to handle potential intensification of corporate distress. - Introduce or scale up out-of-court insolvency mechanisms where absent. - Improve the quality of liquidation regimes. - Enhance regulation and oversight of insolvency professionals. - Monitor bank and nonbank lending standards and the transmission of higher funding costs to corporate sector solvency. ### Empirical framework and data (Annex 1 summary) - Sample: - Quarterly balance sheet data from S&P Compustat North America and Compustat Global on nonfinancial listed firms for 48 countries (23 EMs and 25 AEs) from the first quarter of 2000 to the fourth quarter of 2019. - The sample excludes financial firms (banks, diversified financials, and insurance firms). - Nominal variables are deflated with the respective country consumer price index deflator. - Estimation approach: - Local projection methods (Jordà 2005) estimating effects of country-specific monetary policy shocks R_c,t on firm outcomes for horizons 0, 1, ... 20. - Dependent variables: cumulative percentage change in the logarithm of investment in physical and intangible assets and in total debt from period h to t + h; implicit interest (total interest payments over lagged total debt) uses first difference in level. - Controls and fixed effects: - Firm fixed effects α_i. - Four lags of the dependent variable and firm-specific characteristics Z_{i,t−1}: the logarithm of total assets (firm size), debt-to-asset ratio (leverage), and net liquid asset ratio (current assets net of current liabilities over total assets). - Country–sector–time fixed effects α_{c,s,t}. - Coefficient of interest β measures the differential response to monetary policy shocks of distressed firms relative to nondistressed firms within the same country, industry, and quarter. - Cross-country analysis: - To estimate effects in countries with a high share of distressed firms, model: △_{h}Y_{i,t+h} = α_{i}^{h} + α_{t}^{h} + β_{h} Distressed share_{i,t−1} × R̂_{e,t} + δ_{h} Z_{i,t−1} + ε_{i,t}^{h}, where β_{h} indicates the effect of monetary policy shocks on the performance of the average firm in countries with a one standard deviation increase in the share of distressed firms. ### Monetary policy shocks construction (Annex 1.B summary) - Shocks sourced from Albuquerque and Mao (2023). - Steps: - Extract US monetary policy shocks from financial market data by computing interest rate surprises using movement in three-month Federal Funds Futures within a 30-minute window around Federal Open Market Committee policy announcements. - For each country, estimate a model where R_{c,t} (the one-year government bond yield) is a function of US high-frequency monetary policy surprises S_t and controls X_{t−1}. - Controls X_{t−1} include four lags of real domestic and US GDP growth, domestic consumer price index, domestic current account balances as a percentage of GDP, and the real effective exchange rate. - Country-specific monetary policy shocks are given by the predicted value of R_{c,t}. ### Country coverage (Annex Table 1.1 summary) - Coverage includes 48 countries across Advanced Economies and Emerging Market and Developing Economies (23 EMs and 25 AEs) in Compustat. ### Event-study regression note (Annex 1.C) - OLS regressions analyze ECB’s Corporate Sector Purchase Programme (CSPP) announcements and implementations with various controls and interaction terms; results reported in Annex Table 1.2 (coefficients and significance levels noted in the source). ### Crisis preparedness and insolvency systems (Annex 2 summary) - International standard: - The international standard for insolvency and creditor rights is a composite standard formed by the World Bank Principles and the UN Commission on International Trade Law recommendations in the Legislative Guide on Insolvency Law. - Prepared in consultation with the IMF and included in the Financial Stability Board’s compendium of standards. - Measurement challenges: - A full assessment of compliance with the standard could measure “quality” but is difficult because quality is elusive and depends on both element-by-element adherence and the overall effectiveness of the system. - “Effectiveness” refers to preserving viable enterprises and liquidating unviable ones; “efficiency” refers to achieving these objectives at minimum cost. - Empirical data on the performance of insolvency systems are scarce and comparability across systems is limited. - Capacity considerations: - Capacity (resources to apply the regime) is essential for effectiveness; a high-quality regime may not be effective if capacity is lacking. - Insolvency systems handle a flow of cases that varies with economic conditions; effective systems produce results in reasonable time periods, while ineffective systems accumulate delays and backlogs. - Inefficient systems may not make optimal use of resources, leading to delays, backlogs, and suboptimal outcomes more often. *IMF DEPARTMENTAL PAPERS • Corporate Sector Vulnerabilities and High Levels of Interest Rates* ### Part III, on the insolvency of enterprise groups, was adopted in 2010, and Part IV, on directors’ liabilities, was adopt ### csvhlirea - Part III, on the insolvency of enterprise groups, was adopted in 2010, and Part IV, on directors’ liabilities, was adopt ### Context and challenge - Even for effective and efficient systems, a sudden increase of insolvency cases represents a challenge. - Insolvency systems cannot be increased overnight because insolvency systems tend to be rigid, and capacity increases are only feasible over the medium or long term. - Based on studies of past crises, an annual increase of 200 percent of insolvency cases or more tends to create serious issues and severely affects the functioning of the insolvency system. - Existing indicators focus on selected aspects of ordinary functioning and not on how insolvency regimes react in a crisis. ### Rationale for a crisis-preparedness indicator - A system responds best when a complete set of tools is deployed to address widespread distress situations in enterprises. - An indicator that measures the existence and availability of a set of tools most useful in a crisis provides a measure of crisis preparedness. - The indicator focuses on techniques, features, and institutions relevant for restructuring and insolvency activities and particularly useful in systemic crises. - When a corporate debt crisis occurs, a sudden surge of insolvencies—past episodes show that a 200 percent increase within one year creates stress—delays insolvency cases and frustrates corporate reorganizations. ### Technical description of the indicator - The crisis preparedness indicator examines legal tools and institutions most relevant for treatment of widespread corporate debt distress. - The indicator, originally proposed in Araujo and others (2022), includes five different subindicators composed of a variable number of elements. - The indicator does not offer a general assessment of the quality, effectiveness, or efficiency of the insolvency regime under normal circumstances. - The indicator produces a composite maximum score of 100 that measures the general capacity to tackle a corporate debt crisis. - Each subindicator has the same weight (20) in the total score (100). - The analysis is based on the legal and institutional status of all surveyed countries by November 1, 2023. - The indicator covers 60 countries, representing 91 percent of the world’s GDP and 84 percent of the global population. - Each aspect is graded according to the Regional Operational Security Coordination methodology (four grades: 0–25, 25–50, 50–75, and 75–100). ### Subindicators and their focus areas - The five subindicators (each weight 20 in total score) cover: - Enhancements to out-of-court debt restructuring - Hybrid restructuring - Reorganization - Liquidation - Institutional framework ### Enhancements to out-of-court debt restructuring (structure and weighting) - Out-of-court restructuring is often the standard response in corporate debt crises because it is less costly, more efficient, and scalable. - Core elements (jointly produce 55 percent of the subindicator; maximum 11 points of 100): - Administrative procedures: can reach a maximum score of 50 percent. - Master restructuring agreements: can reach a maximum of 45 percent. - Debt restructuring principles (guidelines or codes of best practice): can reach a maximum of 30 percent. - Note: The maximum score of 55 percent can only be achieved by a combination of elements; administrative procedures can embody master agreements and principles. - Auxiliary elements (remaining 45 percent of the subindicator; each element 15 percent): - Enabling environment for restructuring: specific aspects include existence of a functional debt enforcement regime that pushes debtors to negotiate (6 percent); tax rules that do not penalize restructurings (3 percent); absence of threat of civil or criminal liability for bank or public officials granting concessions (3 percent); strict liability on corporate directors who do not commence formal insolvency proceedings (3 percent); other regulatory incentives for restructuring (3 percent). - Support for SME restructuring: existence of support programs including legal, business, and financial advice and financial support. - Alternative dispute resolution (ADR) techniques: availability and regulation of mediation, arbitration, conciliation; applicability to creditor–debtor and intercreditor disputes; specific use within existing frameworks yields higher score. ### Hybrid restructuring (structure and weighting) - Hybrid restructuring combines out-of-court restructuring with limited judicial intervention (prepackaged insolvency, stays, or preinsolvency procedures). - Weighting and maximums: - Effective prepackaged insolvency may reach up to 75 percent of the score for this subindicator (15 points). - Possibility of a stay supporting informal restructuring negotiations would offer 25 percent of the score (5 points). - Preinsolvency procedures can reach, at best, 90 percent of the score awarded to hybrid restructuring (18 points). - Elements: - Prepackaged insolvency: swift court approval of negotiated plans (most important). - Stay to facilitate negotiations: limited stay to support negotiations; less consequential than prepack or hybrid procedures. - Hybrid (preinsolvency or preventive) procedures: limited court action to support restructuring, risk of becoming procedurally complex if too similar to full reorganizations. ### Reorganization (six equally weighted elements) - Reorganization is vital to preserve going-concern value; six elements each account for one-sixth of the subindicator score: - Debtor-in-possession management: leaving debtor in possession reduces institutional resource use and incentivizes early action; can be under control of insolvency professional acting as examiner. - Stay of creditor actions: comprehensive stays applicable to unsecured, preferential, and secured creditors while balancing protection for secured creditors (e.g., lifting stay where collateral is compromised or automatic lifting after a period). - Treatment of executory contracts: ability to maintain necessary contracts and disclaim loss-generating contracts with damages treated as ordinary unsecured claims. - Postpetition finance: rules to facilitate debtor-in-possession finance with priority and protections (including priming lien where no free assets exist) while safeguarding existing creditors’ rights. - Mechanisms and safeguards for approval of reorganization plans: majority-binding mechanisms, voting by classes, cramdown with safeguards (best interests of creditors’ test and absolute priority rule). - Simplified reorganization for micro and small enterprises: low-cost procedures to reduce time and cost, increasing chances for SMEs to reorganize. ### Liquidation (four equally weighted elements, each 25 percent) - Liquidation reallocates assets and can minimize creditor losses; elements important in crises: - Effectiveness and procedural simplicity: decoupling sale of assets from claims verification and minimizing court involvement to speed proceedings. - Sale of businesses as a going concern: short stay to enable sale of whole business or productive units; general security interest over enterprise assets can allow secured creditors to sell business as a going concern outside insolvency. - Sale of collateral: liquidation should not unduly interfere with sale of collateral subject to security interests; after a brief stay, secured creditors should be able to sell assets while protecting insolvency estate interests. - Technology and flexibility in liquidation: use of digital technology (e-auctions, portals) improves advertising and auction mechanisms; flexibility includes private sales, attributing ownership to creditors, and credit-bids. ### Institutional framework (four elements with specified weights) - Institutional elements particularly useful in corporate debt crises: - Role of courts (30 percent of subindicator): specialized courts or specialized judicial benches; flexibility in creating and filling judicial positions promptly. - Regulation of the insolvency profession (20 percent): ensuring insolvency administrators have qualifications and integrity to optimize system capacity. - Two elements each assigned 25 percent: - Use of technology at the courts: electronic case management, e-filing, e-notices, data collection, publication, hearings, creditor votes. - Support professionals: regulation, qualifications, supervision, and availability of accountants, lawyers, and appraisers to support insolvency processes. *Italic: IMF DEPARTMENTAL PAPERS • Corporate Sector Vulnerabilities and High Levels of Interest Rates (excerpts, Part on crisis-preparedness indicator and subindicators).* ### Annex Table 2.1. Indicator for Crisis Preparedness, 2023 ### Annex Table 2.1. Indicator for Crisis Preparedness, 2023 ### Indicator values, 2023 (raw table lines) - Argentina: 9 119.110.51150.6 - Australia: 14. 5 1510 .1151670.6 - Austria: 9 1814 .1121467.1 - Bangladesh: 5 72.55726.5 - Belgium: 13. 5 1219. 2151271.7 - Brazil: 8 161413960 - Cambodia: 3 0107. 54.525 - Cameroon: 5.5 98.56.5534.5 - Canada: 10.5 151417. 51774 - Chile: 7 813. 39. 515.553.3 - China: 9. 5 13. 51391358 - Colombia: 14 114.812.514.556.8 - Democratic Republic of the Congo: 6 98.56.5434 - Egypt: 9 98.68.5742 .1 - France: 15.5 1814.412.5177 7. 4 - Germany: 14. 5 1816. 313. 51476. 3 - Ghana: 6 7487. 532.5 - Haiti: 4.5 0123.511 - Honduras: 7 07. 88426.8 - India: 11. 5 78.313. 51151. 3 - Indonesia: 7. 5 98.39. 511. 545.8 - Iran: 5 013514 - Ireland: 10 1414 .114.514.567.1 - Israel: 7 1411. 31012.554.8 - Italy: 17 1514.9131271.9 - Japan: 18 1014.5151572.5 - Jordan: 9 010 .167. 532.6 - Kenya: 8.5 118.59946 - Korea: 16 1520131680 - Kyrgyz Republic: 11 106.397. 543.8 - Malaysia: 18 152.51512.563 - Mexico: 6 810 .18.510.54 3 .1 - Myanmar: 3 711. 86.54.532.8 - The Netherlands: 9. 5 181213. 51265 - New Zealand: 12.5 125.8131356.3 - Nicaragua: 5 026.5518. 5 - Nigeria: 6.5 74.58.8 7. 534 - Norway: 11 511. 613. 51556 .1 - Pakistan: 4.5 7 10.3 11941.8 - Papua New Guinea: 5 9 5 8532 - Philippines: 14.512 14. 5 811. 560.5 - Poland: 9. 5 13 9. 5 12.51054.5 - Russia: 6.5 2 13. 5 12.513. 548 - Rwanda: 5 11. 5 11. 6 9. 51047. 6 - Saudi Arabia: 3.5 13 8.8 31442.3 - Singapore: 14.516 14. 3 131875.8 - South Africa: 8.5 9 9. 6 1011. 548.6 - Spain: 1218 14.6 141371.6 - Sri Lanka: 5 7 4.5 11. 5735 - Sweden: 115 15.3 16.51360.8 - Switzerland: 11. 510 11. 8 121257. 3 - Tajikistan: 4.5 0 6.5 6.54.522 - Tanzania: 5 7 5 8631 - Thailand: 105 15. 2 101454.2 - Türkiye: 16.50 6.5 912.544.5 - United Arab Emirates: 1613 13 61462 - United Kingdom: 17. 518 8 1718.579 - United States: 11. 515 20 181882.5 - Venezuela: 4.5 0 2 6517. 5 - Vietnam: 8 0 5 5523 ### Notes on tabular data (2023) - Table header columns (in order): Enhancements to Out-of-Court Debt Restructuring; Hybrid Restructuring; Reorganization; Liquidation; Institutional Framework; Total. - Source line within table: Authors’ calculations. ### Annex Table 2.2. Indicator for Crisis Preparedness, 2021 (raw table lines) - Argentina: 911991149 - Australia: 151510151671 - Austria: 91814121467 - Bangladesh: 5735727 - Belgium: 131013141262 - Brazil: 8141412957 - Cambodia: 30108526 - Cameroon: 6997536 - Canada: 111514161773 - Chile: 71010101653 - China: 10141391460 - Colombia: 141515131471 - Republic of Congo: 6997435 - Egypt: 9999743 - France: 161812131776 - Germany: 151816141477 - Ghana: 6748833 - Haiti: 5012412 - Honduras: 7088427 - India: 1278141253 - Indonesia: 89891044 - Iran: 5013514 - Ireland: 101414151366 - Israel: 71411101355 - Italy: 111514131366 - Japan: 171015151572 - Jordan: 90106833 - Kenya: 81199946 - Korea: 191620131684 - Kyrgyz Republic: 111069844 - Malaysia: 18153151364 - Mexico: 68109942 - Myanmar: 37127534 - The Netherlands: 71812141263 - New Zealand: 13126131357 - Nicaragua: 5027519 - Nigeria: 7439427 - Norway: 11012141552 - Pakistan: 571011942 - Papua New Guinea: 5958532 - Philippines: 15121581060 - Poland: 101310131056 - Russia: 7214131450 - Rwanda: 51212101049 - Saudi Arabia: 413931443 - Singapore: 131614131874 - South Africa: 9910101250 - Spain: 131611141468 - Sri Lanka: 57512736 - Sweden: 11012171353 - Switzerland: 10101291253 - Tajikistan: 5077524 - Tanzania: 5758631 - Thailand: 10515101454 - Türkiye: 170791346 - United Arab Emirates: 11131361457 - United Kingdom: 18188171980 - United States: 111520181882 - Venezuela: 5026518 - Vietnam: 8055523 - Source line within table: Araujo and others (2022). ### Comparisons and context (tables) - Two vintages of the Indicator for Crisis Preparedness are presented: 2023 and 2021. - The 2023 table lists country-level numeric entries aligned with the same column structure as the 2021 table. - Source attribution in the 2023 table: Authors’ calculations. Source attribution in the 2021 table: Araujo and others (2022). ### Annex 3 — Specific Insolvency and Restructuring Issues (substantive findings and policy guidance) - Overarching finding: - Rather than general corporate debt crises, the probability is the occurrence of crises in certain economic sectors; sectoral crises in the corporate sector may have serious consequences for financial institutions. - Commercial real estate (CRE) — issues and recommended preconditions: - CRE is among the vulnerable sectors that could be most concerning because of the considerable financial resources real estate requires. - Preconditions to resolve CRE distress: - A functioning mortgage regime. - A full set of options to restructure, liquidate, and reorganize entities that conduct CRE business. - Reorganization can be useful for complex enterprises that require an overhaul of their business model to recover viability. - Accelerated enforcement for CRE: - Splitting the legal regime for mortgage enforcement can facilitate resolution of CRE distress. - Fast-track regimes for enforcement of mortgages over CRE, or out-of-court enforcement, can reduce lender risk and improve access to credit for developers. - The European Union formulated a proposal for an “accelerated extra judicial collateral enforcement” (European Council 2018), but there is resistance among member states to harmonization that removes judicial protections. - Improvements in enforcement efficiency should respect basic safeguards protecting borrowers. - Bond restructuring — regulatory and institutional priorities: - NBFIs often finance through bond purchases; strengthening mechanisms for restructuring market debt is necessary because NBFIs invest in riskier segments of the corporate sector (see Section 4). - Legislative and regulatory areas to assess and improve (OECD 2023). - Regulation of trustees: - Proper regulation of bond trustees is essential for bondholder protection. - Trustees should have coordinating functions and be able to communicate with and consult bondholders on legal actions in default. - China and Vietnam have recently introduced reforms to strengthen trustees’ roles and allow more effective treatment of bond defaults. - Regulation of bondholder meetings: - Bondholder meetings should have key responsibilities for decision making with distressed issuers, help organize bondholders, share information, and resolve collective action problems. - Out-of-court restructuring: - Preferred option in most distress cases because of lower costs and reduced reputational versus judicial proceedings. - Law and rules for bondholder meetings should allow majority decision making in rescheduling or reducing issuer debt. - The United States has seen proposals for the introduction of a new Chapter 16 of the Bankruptcy Code for the restructuring of bonds (Wetlitzky 2021). - Participation of bondholders in insolvency proceedings: - Connect governance mechanisms of bonds with governance of insolvency proceedings. - Assign a role to the trustee (for instance, as member of the creditors’ committee). - Ensure bondholders can participate in insolvency proceedings without interfering with process functioning. - Establishing a creditor class for bondholders is key to protect bondholders within ordinary insolvency operation. - Footnote: Restructuring of bonds in the United States is notoriously difficult because Section 316(b) of the Trust Indenture Act of 1939 requires unanimous approval from bondholders in a restructuring. - The role of the state as creditor — challenges and recommended approaches: - The state became a major creditor to enterprises given the level of support extended during the pandemic (Araujo and others 2022); this complicates debt resolution in widespread corporate distress. - Key considerations: - Assess fiscal space available to take losses on loan defaults and guarantees; balance supporting economic activity with minimizing taxpayer costs. - State actions should preserve a market economy, avoid continuation of zombie enterprises, and make economically justifiable decisions. - Specific challenges where state is significant creditor: - Write-downs: - States may face special requirements or restrictions when writing down public debt. - Regimes for public claims vary; tax and social security claims can be more challenging to restructure. - Need for early intervention: - Restructuring requires early identification and decisive action before deterioration prevents rescue. - The state is often less agile than private creditors and can delay restructuring initiation. - Priority of state claims: - In some countries, all public claims enjoy priority; tax and social security claims often have priority (examples: China, France, the United States). - Rare cases of “super-priorities” prevail over secured creditors’ claims (examples: Honduras, Venezuela). - Other countries have abolished tax priorities (examples: Australia, Austria, Denmark, Germany). - The United Kingdom reintroduced some priorities for withholding taxes. - Priorities can complicate negotiations because private creditor concessions may benefit the state’s position. - Claims connected with policy support programs may have specific rules; unsecured public claims are easier for the state to haircut. - Decision making, participation, and voting on a plan: - State participation in negotiations is complex; public officials may refrain from participating due to concerns about criminal liability (for example, under anticorruption laws related to “dissipation of state assets”). - Remedies: - Reforms in criminal law (example: Türkiye). - Providing guidance to public officials on their role in insolvency proceedings (examples: Germany, Spain). - Introduction of mechanisms that limit discretion of public officials (example: Greece approved algorithmic support for public creditors to restructuring proposals). - Coordination: - Multiple government agencies may collect different claims (tax, social security, support-program claims); coordination is required. - Designating a single legal representative to act on behalf of all public creditors in insolvency litigation can be useful (example: Spain). - Liquidation and state reluctance: - Priority of state claims in liquidation can reduce recoveries for unsecured creditors. - The state is often reluctant to initiate liquidation because it signals failure of support measures and has negative effects for entrepreneurs and workers. - Practice: the state tends to leave initiative to private creditors or the debtor; however, state participation in liquidation proceedings supports market exit of inefficient enterprises. - Avoiding liquidation at all costs risks zombification. - Policy guidance for state as creditor: - The state needs to act as a “private creditor,” taking decisions based on the most productive outcome: restructuring, reorganization, or liquidation. - State actions should: - Limit moral hazard. - Remain competition neutral. - Follow good governance practices. - Preserve the efficiency of the insolvency process. *Source: Authors’ calculations.* ### References ### References ### Corporate vulnerabilities, firm distress, and zombies - Abidi, Nordine, and Mohamed Belkhir. 2022. “Corporate Vulnerabilities in the Middle East, North Africa, and Pakistan in the Wake of the COVID-19 Pandemic.” IMF Working Paper 22/71, International Monetary Fund, Washington, DC. - Albuquerque, Bruno. 2024. “Corporate Debt Booms, Financial Constraints and the Investment Nexus.” Journal of Applied Econometrics 39 (5): 766–89. - Albuquerque, Bruno, and Jonas Becker. 2024. “Nonbank Crisis Lending in Bond and Loan Markets.” Unpublished. - Albuquerque, Bruno, and Roshan Iyer. 2024. “The Rise of the Walking Dead: Zombie Firms around the World.” Journal of International Economics 152, 10 4 019. - Albuquerque, Bruno, and Chenyu Mao. 2023. “The Zombie Lending Channel of Monetary Policy.” IMF Working Paper 23/192, International Monetary Fund, Washington, DC. - Banerjee, Ryan, and Boris Hofmann. 2022. “Corporate Zombies: Anatomy and Life Cycle.” Economic Policy 37 (112): 757–803. - Caballero, Ricardo J., Takeo Hoshi, and Anil K. 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Turner. 2021. “Nonbanks, Banks, and Monetary Policy: U.S. Loan-Level Evidence since the 1990s.” CEPR Discussion Paper 14989, Centre for Economic Policy Research, London. - Fleckenstein, Quirin, Manasa Gopal, German Gutierrez, and Sebastian Hillenbrand. 2021. “Nonbank Lending and Credit Cyclicality.” NYU Stern School of Business. https://ssrn.com/abstract=3629232 - Cloyne et al., (2023) and related works listed under monetary policy transmission addressing corporate finance linkages to market-based lenders. - Cerutti, Eugenio, Galina Hale, and Camelia Minoiu. 2015. “Financial Crises and the Composition of Cross-Border Lending.” Journal of International Money and Finance 52: 60 – 81. - Doerr, Sebastian, and Philipp Schaz. 2021. “Geographic Diversification and Bank Lending during Crises.” Journal of Financial Economics 14 0 (3): 768 – 88. - Chernenko et al. 2022; Cloyne et al. 2023; and related papers above on nonbank intermediation roles during stress. ### Insolvency, restructuring, bankruptcy law, and policy frameworks - Andre, Christophe, and Lilas Demmou. 2022. “Enhancing Insolvency Frameworks to Support Economic Renewal.” OECD Economics Department Working Paper 1738, Organisation for Economic Co-operation and Development, Paris. - Araujo, Juliana, Jose Garrido, Emanuel Kopp, Richard Varghese, and Weijia Yao. 2022. “Policy Options for Supporting and Restructuring Firms Hit by the COVID-19 Crisis.” IMF Departmental Paper 2022/002, International Monetary Fund, Washington, DC. - Arena, Marco, Ruo Chen, Alfredo Cuevas, Karim Foda, Borja Gracia, Estelle Xue Liu, Alex Pienkowski, and others. 2021. “Who Bore the Brunt of the Pandemic in Europe? Shifting Private Stress to the Public Sector.” IMF Departmental Paper 2021/015, International Monetary Fund, Washington, DC. - Bauer, Andreas, R. S. Craig, Jose M. Garrido, Kenneth H. Kang, Kenichiro Kashiwase, Sung Jin Kim, Yan Liu, and others. 2021. “Flattening the Insolvency Curve: Promoting Corporate Restructuring in Asia and the Pacific in the Post-C19 Recovery.” IMF Working Paper 2021/016, International Monetary Fund, Washington, DC. - Eidenmüller, Horst, and Javier Paz Valbuena. 2021. “Towards a Principled Approach for Bailouts of COVID-Distressed Critical/Systemic Firms.” South Carolina Law Review 73 (2): 10. - Feibelman, Adam. 2022. “Bankruptcy and the State.” Emory Bankruptcy Developments Journal 38 (1): 1. - Garrido, Jose, Wolfgang Bergthaler, Chanda Delong, Juliet Johnson, Amira Rasekh, and Natalia Stetsenko. 2019. “The Use of Data in Assessing and Designing Insolvency Systems.” IMF Working Paper 2019/27, International Monetary Fund, Washington, DC. - Garrido, Jose, Chanda DeLong, Amira Rasekh, and Anjum Rosha. 2021. “Restructuring and Insolvency in Europe: Policy Options in the Implementation of the EU Directive.” IMF Working Paper 2021/152, International Monetary Fund, Washington, DC. - Liu, Yan, Jose Garrido, and Chanda DeLong. 2020. “Private Debt Resolution in the Wake of the Pandemic.” IMF COVID-19 Special Series, International Monetary Fund, Washington, DC. - Van Zwieten, Kristin, Horst Eidenmüller, and Oren Sussman. 2020. “Bail-outs and Bail-ins Are Better Than Bankruptcy: A Comparative Assessment of Public Policy Responses to COVID-19 Distress.” ECGI Law Working Paper 535/2020, European Corporate Governance Institute, Brussels. - Wetlitzky, Tobias. 2021. “Water under the Bridge? A Look at the Proposal for a New Chapter 16 of the Bankruptcy Code from a Comparative Law Perspective.” Emory Bankruptcy Developments Journal 37 (2): 255. - Aw, Irving, Brendan Crowley, and Jose Garrido. Forthcoming. “Should Tax Be King? The Debate on Tax Priority in Insolvency.” IMF Working Paper, International Monetary Fund, Washington, DC. ### COVID-19, policy responses, and public support measures - Araujo et al. 2022. “Policy Options for Supporting and Restructuring Firms Hit by the COVID-19 Crisis.” IMF Departmental Paper 2022/002. - Arena et al. 2021. “Who Bore the Brunt of the Pandemic in Europe? Shifting Private Stress to the Public Sector.” IMF Departmental Paper 2021/015. - Tressel, Thierry, and Xiaodan Ding. 2021. “Global Corporate Stress Tests—Impact of the COVID-19 Pandemic and Policy Responses.” IMF Working Paper 21/212, International Monetary Fund, Washington, DC. - Hong, Gee Hee, and Deborah Lucas. 2023. “Evaluating the Costs of Government Credit Support Programs during COVID-19: International Evidence.” IMF Working Paper 2023/16, International Monetary Fund, Washington, DC. - Blanchard, Olivier, Thomas Philippon, and Jean Pisani-Ferry. 2020. “A New Policy Toolkit Is Needed as Countries Exit COVID-19 Lockdowns.” PIIE Policy Brief 20-8, Peterson Institute for International Economics, Washington, DC. - Liu, Yan, Jose Garrido, and Chanda DeLong. 2020. “Private Debt Resolution in the Wake of the Pandemic.” IMF COVID-19 Special Series. ### Corporate finance, debt structure, and firm-level outcomes - Almeida, Heitor, Murillo Campello, Bruno Laranjeira, and Scott Weisbenner. 2011. “Corporate Debt Maturity and the Real Effects of the 2007 Credit Crisis.” Critical Finance Review 1 (1): 3–58. - Benmelech, Efraim, Carola Frydman, and Dimitris Papanikolaou. 2019. “Financial Frictions and Employment during the Great Depression.” Journal of Financial Economics 133 (3): 541–63. - Merton, Robert C. 1974. “On the Pricing of Corporate Debt: The Risk Structure of Interest Rates.” Journal of Finance 29 (2): 449–70. - Peek, Joe, and Eric S. Rosengren. 2005. “Unnatural Selection: Perverse Incentives and the Misallocation of Credit in Japan.” American Economic Review 95 (4): 1144–66. - Brauning, Falk, Gustavo Joaquim, and Hillary Stein. 2023. “Interest Expenses, Coverage Ratio, and Firm Distress.” Current Policy Perspectives, Federal Reserve Bank of Boston. - Müller, Karsten, and Emil Verner. 2024. “Credit Allocation and Macroeconomic Fluctuations.” Review of Economic Studies 91 (6): 3645–76. - Farre-Mensa, Joan, and Alexander Ljungqvist. 2016. “Do Measures of Financial Constraints Measure Financial Constraints?” Review of Financial Studies 29 (2): 271–308. - Haltiwanger, John C. 2021. “Entrepreneurship during the COVID-19 Pandemic: Evidence from the Business Formation Statistics.” NBER Working Paper 28912, National Bureau of Economic Research, Cambridge, MA. - Bahaj, Salem, Angus Foulis, Gabor Pinter, and Paolo Surico. 2022a. “Employment and the Residential Collateral Channel of Monetary Policy.” Journal of Monetary Economics 131: 26 – 4 4. - Bahaj, Saleem, Sophie Piton, and Anthony Savagar. 2022b. “Business Creation during COVID-19.” Staff Working Paper 981, Bank of England, London. ### Cross-border finance, capital flows, and market functioning - Cerutti, Eugenio, Galina Hale, and Camelia Minoiu. 2015. “Financial Crises and the Composition of Cross-Border Lending.” Journal of International Money and Finance 52: 60 – 81. - De Haas, Ralph, and Neeltje Van Horen. 2013. “Running for the Exit? International Bank Lending during a Financial Crisis.” Review of Financial Studies 26 (1): 244–85. - Panigirtzoglou, Nikolaos and others. 2023. “Bond Markets Had Been Trading Increasingly Long before This Week.” Flows & Liquidity. JPMorgan Global Markets Strategy, August 24. - Cerutti et al. 2015; De Haas and Van Horen 2013; and Elliott et al. 2021–2023 on international spillovers and cross-border lending. ### Institutional reports, datasets, and monitoring - Financial Stability Board (FSB). 2023. “Global Monitoring Report on Non-Bank Financial Intermediation 2023.” Basel. https://www.fsb.org/2023/12/global-monitoring-report-on-non -bank-financial -intermediation-2023/ - International Monetary Fund (IMF). 2019. Global Financial Stability Report: Lower for Longer. Washington, DC, October. - International Monetary Fund (IMF). 2020. Global Financial Stability Report: Markets in the Time of COV I D -19. Washington, DC, April. - International Monetary Fund (IMF). 2021. Global Financial Stability Report: Preempting a Legacy of Vulnerabilities. Washington, DC, April. - International Monetary Fund (IMF). 2022. Global Financial Stability Report: Navigating the High-Inflation Environment. Washington, DC, October. - International Monetary Fund (IMF). 2023a. World Economic Outlook: Navigating Global Divergences.” Washington, DC, October. - International Monetary Fund (IMF). 2023b. Global Financial Stability Report: Financial and Climate Policies for a High-Interest-Rate Era. Washington, DC, October. - International Monetary Fund (IMF). 2023c. Global Financial Stability Report: Safeguarding Financial Stability amid High Inflation and Geopolitical Risks. Washington, DC, April. - International Monetary Fund (IMF). 2024a. “United States: 2024 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the United States.” IMF Country Report 24/232, Washington, DC. - International Monetary Fund (IMF). 2024b. World Economic Outlook—Steady but Slow: Resilience amid Divergence.” Washington, DC, April. - International Monetary Fund (IMF). 2024c. Global Financial Stability Report—The Last Mile: Financial Vulnerabilities and Risks. Washington, DC, April. - Laeven, Luc, and Fabian Valencia. 2020. “Systemic Banking Crises Database II.” IMF Economic Review 68(2): 3 07– 3 61. _Corporate Sector Vulnerabilities and High Levels of Interest Rates, DP/2025/001, ISBN 9798400292385_ --- _Source: https://www.imf.org/-/media/files/publications/dp/2025/english/csvhlirea.pdf_