## ch3

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---

### Introduction
- Geographic focus: G7 economies.
- Temporal focus: "from the beginning of February to the end of June."
- Key analytic aims:
  - Analyze impact of COVID-19 on aggregate credit volumes across segments of the corporate debt market and effects of policy response on debt financing choices of large firms.
  - Quantify credit supply shocks and the evolution of aggregate credit market conditions.
  - Examine whether ease of access to external finance, or liquidity position, affected firm-level financial performance in the early stages of the crisis.
  - Gauge the impact of key policy announcements on the supply of corporate credit during the containment phase.

### Crisis overview and immediate market effects
- The COVID-19 pandemic "severely disrupted business activity and clouded the economic outlook amid heightened uncertainty."
- Corporate cash flows were "heavily impaired in many industries," with adverse implications for corporate liquidity and solvency.
- Early-year disruptions in major advanced economies:
  - Corporate bond funds, loan funds, and prime money market funds faced large outflows.
  - Collapse in issuance of nonfinancial corporate bonds, syndicated loans, and commercial paper.
  - A jump in corporate spreads.
  - Many firms engaged in a "dash for cash" drawing on existing credit lines.

### Policy response and market normalization
- Policymakers announced a wide range of powerful measures, including unprecedented steps such as new Federal Reserve facilities to support corporate credit.
- The combination of fiscal, monetary, and financial policy measures "helped normalize financial conditions during the second quarter."
- Corporate spreads remained wider than at the beginning of the year, "especially in the high-yield segment."
- Warning: "Premature withdrawal of policy support could jeopardize the success achieved so far in broadly meeting the nonfinancial corporate sector’s liquidity and funding needs."

### High-level findings (Chapter summary)
- "In the Group of Seven (G7) economies, nonfinancial corporate borrowing surged in March and during the second quarter of 2020, benefiting from unprecedented policy support as a consequence of the coronavirus disease (COVID-19) crisis."
- "Credit supply conditions across the G7 were generally favorable during the second quarter, yet the buoyancy of the bond market in the United States stood in sharp contrast to tighter loan market lending standards in that country."
- "Among listed firms, those vulnerable to liquidity shocks suffered relatively more financial stress in the early stages of the COVID-19 crisis, and residual signs of strain remained as of the end of June."
- "Premature withdrawal of policy support could jeopardize the success achieved so far in broadly meeting the nonfinancial corporate sector’s liquidity and funding needs."

### Surge in debt financing and cash balances
- Loans share of corporate debt funding in G7 economies: "58 percent in the United States to 90 percent in Germany"; remainder is debt securities.
- For issuance by large firms, "the ratio of syndicated loans ... to bonds ranges from two to three."
- Bank credit to firms "grew significantly in March and in the second quarter" in all seven economies; year-over-year bank credit growth in the first half of the year was "clearly above trend."
- Listed firms’ credit line drawdowns increased "more than 40 percent, on average, compared with the first half of 2019."
- In the United States, net drawdowns at the end of March "doubled, representing an increase of $250 billion."
- Drawdown timing and utilization:
  - Drawdowns were concentrated in March with a peak on the last day of the month.
  - Gross drawdowns in the United States subsided at the beginning of April, reducing utilization rates.
  - United States and Canada: gross drawdowns subsided at beginning of April with declining utilization rates.
  - Japan: drawdown activity "continued during the second quarter, resulting in a utilization rate of 60 percent."
  - Across the seven economies, "utilization rates ... remained well below 50 percent, on average, at the end of June."
- Bank credit in Q2 also reflected government programs that transferred part or all credit risk to the sovereign.
- Direct support programs to corporate funding "represented between 2.6 and 34 percent of GDP as of June 12."
- Direct programs complemented on-budget fiscal measures: grants, employment support, tax reductions.

### Syndicated loans and leveraged credit markets
- Syndicated loan issuance in H1 2020:
  - Stronger than 2019 in Europe and Japan.
  - Weaker in the United States and Canada, especially during the second quarter.
- Drivers:
  - Surge in investment-grade loan issuance in Europe and Japan.
  - Drop in leveraged loan issuance outside Germany and Italy.
- CLO and leveraged loan dynamics:
  - CLO new issuance "has been slow to restart."
  - New CLO supply ran "at half of last year’s pace," while accounting for "more than 70 percent of new leveraged loan demand."
  - CLO investors were concerned about downgrades and defaults that "may affect lower-rated tranches."

### Corporate bond markets and issuance composition
- Corporate bond markets were "generally more resilient" in Q1 despite mid-March pressure.
- Late-March central bank policy responses, especially facilities supporting corporate bond markets, "appear to have boosted activity" and helped reverse corporate bond fund outflows.
- Investment-grade issuance in Q2 surged in several jurisdictions to "levels twice as large as those in 2019," "especially in the United States in March."
- High-yield issuance:
  - More muted outside the United States.
  - United States high-yield issuance during Q2 "more than double compared with that in 2019."
- Characteristics of new high-yield debt in G7 H1 2020:
  - "Nearly 60 percent of high-yield new issues ... were BB rated."
  - "More than 30 percent of the bonds were secured," the highest levels "for the past 15 years at least."
  - By use of proceeds, "more than 80 percent of year-to-date supply was for refinancing existing debt" or short-term needs such as working capital.
  - Issuances for acquisition and dividends or share repurchases were "at their lowest in a decade."

### Investment-grade and high-yield issuance dynamics (United States focus)
- The analysis documents a shift toward bond financing in the United States but not in other jurisdictions.
  - This suggests the Federal Reserve’s March 23 announcement of its new corporate credit facilities had a stimulative impact on domestic bond markets.
  - As of August 31, no purchases had been made on the primary markets under those facilities.
- The shift toward bond financing in the United States occurred in both investment-grade and high-yield segments; the investment-grade shift was visible in Q1 in line with record March issuance.
- Commercial paper dynamics:
  - US commercial paper volumes have not recovered since the March drop despite reintroduction of the Federal Reserve’s Commercial Paper Funding Facility on March 17 and inflows resuming into prime funds.
  - Euro area commercial paper issuance rebounded quickly and hit a record high in June, supported by ECB expansions.
  - Bank of Canada and Bank of England also introduced commercial paper purchase programs; Bank of Japan stepped up its existing program.
- Total debt growth and cash buildup:
  - Year-over-year growth rate of total debt of listed firms was generally exceeding 10 percent.
  - Credit line drawdowns were notable in Canada and the United States during Q1.
  - Evidence suggests additional borrowing was used mostly to build cash reserves.

### Corporate cash accumulation (selected figures)
- Listed firms’ cash and short-term investments accumulation in Q1:
  - Japan: about 0.5 percent of assets.
  - Canada: about 1.5 percent of assets.
  - United States: about 1.5 percent of assets.
- During Q2:
  - Listed Japanese and US firms built cash buffers further.
  - Listed Canadian firms reduced cash buffers somewhat.
- Nonfinancial corporate deposit data show a further large expansion during Q2, especially in France and the United Kingdom.

### Evolution of credit supply conditions
- Bank lending survey change shown as an index ranging from –100 to 100.
- Reporting differences:
  - Canada, euro area economies, and the United Kingdom report a balance of opinions weighted by asset size with a base value of 0.
  - Japan reports a balance of opinion weighted by the level of easing or tightening.
  - United States reports an unweighted balance of opinion in two categories by firm size; the figure shows the simple average of the two.
- Euro area: credit conditions eased in the syndicated loan market and remained broadly neutral in the bond market.
- Japan: bond market conditions tightened in March and remained slightly on the tight side in Q2.
- Cross-market differences reflect relative strengths of policy responses, scope of government-sponsored loan guarantee programs, and investor search for yield.

### Greater financial stress initially for some vulnerable firms
- Vulnerability dimensions measured at end-2019:
  - (1) small size (low total assets),
  - (2) low cash and short-term financial investments relative to industry peers (as a share of total assets),
  - (3) high short-term debt net of cash and short-term financial investments (as a share of total assets).
- Leverage amplification: leverage amplified the effect of the COVID-19 negative cash flow shock in five of the seven economies.
- Equity performance findings (February–March and early period):
  - Small firms’ underperformance during February–March in Germany, Japan, the United Kingdom, and the United States was close to, or greater than, 10 percentage points (cumulative abnormal returns).
  - Firms with relatively less cash suffered more financial stress in the United Kingdom and the United States.
  - Firms with higher short-term debt (net of cash) suffered more in France, the United Kingdom, and the United States.
  - In these five cases, underperformance of firms with liquidity vulnerabilities between early February and end-March was about 5 percentage points.
- Definitions:
  - Leverage = debt-to-asset ratio; high-leverage (low-leverage) = top (bottom) half of leverage distribution.
  - Low-relative-cash (high-relative-cash) = lowest (highest) tercile of the relative cash distribution.
  - Small = lowest tercile of total assets.
  - Liquidity gap = total short-term financing minus cash and short-term investments as a ratio of total assets; high-liquidity-gap = highest tercile.

### Policies that helped relieve funding stress — empirical evidence
- Analytical approaches:
  - Short window: effect of policy announcements on relative stock market performance of most vulnerable firms over two trading days, net of extreme global volatility.
  - Longer window: relative stock market performance extended to end of June for groups that underperformed in February–March.
- Sample facts:
  - Pooling all 85 announcement days, policy announcements produced:
    - about 0.3 percentage point of overperformance a day over two days for smaller firms,
    - about 0.1 percentage point a day over two days for high-leverage firms.
  - No significant pooled effect found for firms with liquidity vulnerabilities in the aggregate short-window test.
  - Global volatility defined as extreme when VIX is above the 80th percentile of its distribution during February–June 2020.
- Policy-type heterogeneity:
  - Policies with a direct impact on corporate funding (government guarantees or central bank purchases of corporate securities) benefited liquidity-vulnerable firms relatively more than indirect-impact policies.
  - Estimated average effects for direct-impact announcements (over two days):
    - 0.2 percentage point a day over two days for liquidity-poor firms,
    - 0.13 percentage point a day over two days for cash-poor firms.
  - No observed difference across policy types for high-leverage firms and small firms in pooled estimates.
- Country-specific and medium-run findings:
  - Short-window tests suggest positive effects for small firms in Canada and for small and high-leverage firms in Japan.
  - By end-June:
    - Stress at smaller firms had generally disappeared except in the United Kingdom (where it remained significant).
    - Strains in high-leverage firms persisted in Germany and Japan.
    - Stress for firms with liquidity vulnerabilities persisted in France, the United Kingdom, and the United States.

### Conclusion and policy considerations
- The March tightening of credit conditions across G7 economies was largely quelled by unprecedented policy interventions; the nonfinancial corporate sector, as a whole, was generally able to obtain funding needed to continue operating during Q2.
- Remaining strains centered on bank-dependent firms and firms with pre–COVID-19 liquidity vulnerabilities, notably in the United States and the United Kingdom.
- Policy implications:
  - Carefully calibrate withdrawal of fiscal policy support to funding markets; policies supporting firms directly appeared most beneficial for liquidity-vulnerable firms and cushioned strains in smaller firms.
  - Key near- to medium-term financial-stability concern: deterioration in corporate solvency from reduced profitability and increased indebtedness, which will affect banks’ asset quality and capital adequacy and could limit credit supply to firms over the next several quarters.
- Data limitation: lack of firm-level data for unlisted small and medium-sized enterprises in 2020 prevents establishing the degree to which conclusions carry over to those firms.

### Chapter 1 linkages: policy road map and regulatory implications
- Chapter 1 provides a policy road map for reopening and recovery and discusses trade-offs relevant to corporate funding issues, including impact on fiscal space, sovereign contingent liabilities, and risk of capital misallocation.
- Lessons and regulatory implications:
  - Once recovery is entrenched, examine reasons for the fragility experienced in March.
  - Revisit regulation of nonbank financial institutions and devise mechanisms to enhance nonbank resilience to large liquidity shocks.
  - Supervisory authorities should continue to monitor corporate vulnerabilities closely and consider macro‑prudential policy tools for the nonfinancial corporate sector.

*International Monetary Fund | Chapter 3 (excerpt) — GLOBAL FINANCIAL STABILITY REPORT: BRIDGE TO RECOVERY, October 2020*

### Introduction

### Introduction

### Crisis overview and immediate market effects
- The COVID-19 pandemic triggered a deep global economic crisis through closures, restrictions, and social distancing that "severely disrupted business activity and clouded the economic outlook amid heightened uncertainty."
- Corporate cash flows were "heavily impaired in many industries," with adverse implications for corporate liquidity and solvency.
- In major advanced economies, severe disruptions to corporate funding markets became apparent early in the year: corporate bond funds, loan funds, and prime money market funds faced large outflows, causing a collapse in issuance of nonfinancial corporate bonds, syndicated loans, and commercial paper, and a jump in corporate spreads.
- Many firms turned to existing credit lines in a "dash for cash."

### Policy response and market normalization
- Policymakers quickly announced a wide range of powerful policy measures, including unprecedented steps such as new Federal Reserve facilities to support corporate credit.
- The combination of fiscal, monetary, and financial policy measures "helped normalize financial conditions during the second quarter."
- Corporate spreads remained wider than at the beginning of the year, "especially in the high-yield segment," reflecting remaining concerns about default risk.
- Premature withdrawal of policy support could jeopardize the success achieved so far in broadly meeting the nonfinancial corporate sector’s liquidity and funding needs.

### Chapter scope and analytic focus
- Geographic focus: G7 economies, chosen for "global systemic relevance and their relatively better data availability."
- Temporal focus: early stages of the crisis "from the beginning of February to the end of June."
- Key analytic aims:
  - Analyze impact of COVID-19 on aggregate credit volumes across segments of the corporate debt market and effects of policy response on debt financing choices of large firms.
  - Quantify credit supply shocks and the evolution of aggregate credit market conditions.
  - Examine whether ease of access to external finance, or liquidity position, affected firm-level financial performance in the early stages of the crisis.
  - Gauge the impact of key policy announcements on the supply of corporate credit during the containment phase.

### High-level findings (Chapter summary)
- From the "Chapter 3 at a Glance" box:
  - "In the Group of Seven (G7) economies, nonfinancial corporate borrowing surged in March and during the second quarter of 2020, benefiting from unprecedented policy support as a consequence of the coronavirus disease (COVID-19) crisis."
  - "Credit supply conditions across the G7 were generally favorable during the second quarter, yet the buoyancy of the bond market in the United States stood in sharp contrast to tighter loan market lending standards in that country."
  - "Among listed firms, those vulnerable to liquidity shocks suffered relatively more financial stress in the early stages of the COVID-19 crisis, and residual signs of strain remained as of the end of June."
  - "Premature withdrawal of policy support could jeopardize the success achieved so far in broadly meeting the nonfinancial corporate sector’s liquidity and funding needs."

### Surge in debt financing and cash balances
- Loans are the major source of corporate debt funding in the G7 economies, ranging from "58 percent in the United States to 90 percent in Germany" in the latest financial accounts data; the remainder is composed of debt securities.
- For issuance by large firms, "the ratio of syndicated loans ... to bonds ranges from two to three."
- Outstanding amounts of bank credit to firms "grew significantly in March and in the second quarter" in all seven economies analyzed; on a year-over-year basis, bank credit growth in the first half of the year was "clearly above trend."
- Listed firms’ credit line drawdowns "increased more than 40 percent, on average, compared with the first half of 2019."
- In the United States, net drawdowns at the end of March "doubled, representing an increase of $250 billion," comparable to the increase in commercial and industrial loans by domestic banks over the same period.
- Drawdowns were concentrated in March with a peak on the last day of the month; gross drawdowns in the United States subsided at the beginning of April, reducing utilization rates (the share of credit line commitments used).
- Drawdown dynamics by economy:
  - United States and Canada: gross drawdowns subsided at beginning of April with declining utilization rates.
  - Japan: drawdown activity "continued during the second quarter, resulting in a utilization rate of 60 percent."
  - Across the seven economies, "utilization rates ... remained well below 50 percent, on average, at the end of June."
- Bank credit developments in Q2 also reflected government programs (notably off-budget credit guarantees and government-sponsored loans with grant components) that transferred part or all credit risk to the sovereign.
- Direct support programs to corporate funding "represented between 2.6 and 34 percent of GDP as of June 12."
- These programs complemented on-budget fiscal measures supporting corporate cash flows and solvency (grants, employment support, tax reductions).

### Syndicated loans and leveraged credit markets
- Syndicated loan issuance in H1 2020 was heterogeneous:
  - Generally stronger than 2019 in Europe and Japan.
  - Weaker in the United States and Canada, especially during the second quarter.
- Driven factors:
  - Surge in investment-grade loan issuance in Europe and Japan.
  - Drop in leveraged loan issuance outside Germany and Italy.
- Weak recovery in leveraged loan markets was largely driven by subdued demand from the traditional investor base; collateralized loan obligation (CLO) new issuance "has been slow to restart."
- New CLO supply ran "at half of last year’s pace," while still accounting for "more than 70 percent of new leveraged loan demand."
- CLO investors were concerned about a wave of downgrades and defaults, which "may affect lower-rated tranches."

### Corporate bond markets and issuance composition
- Corporate bond markets were "generally more resilient" in Q1 despite intense pressure in mid-March.
- Policy responses by central banks in late March, especially facilities aimed at directly supporting corporate bond markets, "appear to have boosted activity" and contributed to a reversal in corporate bond fund flows.
- During the second quarter, "investment-grade issuance surged to levels twice as large as those in 2019" in several jurisdictions, "especially in the United States in March."
- High-yield segment response varied:
  - More muted outside the United States, possibly due to underdevelopment of high-yield markets and central bank purchase focus on investment-grade.
  - United States saw high-yield issuance during Q2 "more than double compared with that in 2019."
- Characteristics of new high-yield debt in G7 economies in H1 2020:
  - "Nearly 60 percent of high-yield new issues ... were BB rated."
  - "More than 30 percent of the bonds were secured," the highest levels for "the past 15 years at least."
  - By use of proceeds, "more than 80 percent of year-to-date supply was for refinancing existing debt" or for short-term needs such as working capital.
  - Issuances for acquisition and dividends or share repurchases were "at their lowest in a decade."

### Implications and heterogeneity across markets and firms
- For firms with access to bond and syndicated loan markets, the bond market was "clearly the preferred source of debt financing in the United States," but not necessarily in other G7 economies.
- Among listed firms, those with weaker solvency or liquidity positions before COVID-19, and smaller firms, "suffered relatively more financial stress ... in some economies" in the early stages of the crisis; residual signs of strain remained as of end-June.
- Policy interventions, "especially those directly targeting the corporate sector," had a beneficial effect on average in meeting the corporate sector’s liquidity and funding needs.
- The chapter underscores trade-offs in deciding the appropriate level of ongoing policy support, particularly where fiscal space is limited, and warns that "premature withdrawal of policy support could jeopardize" the progress made.

*Source: Chapter 3 — Introduction (ch3 - Introduction), Global Financial Stability Report: Bridge to Recovery, October 2020.*

### 1. Investment Grade Bond Issuance, First Half of 2020

### 1. Investment Grade Bond Issuance, First Half of 2020

### Investment-grade and high-yield issuance dynamics
- Investment-grade bond issuance was buoyant during the second quarter.
- High-yield bond issuance was also buoyant in the United States during the second quarter.
- High-yield bond supply shifted to higher quality with more security and stronger ratings.
- The majority of high-yield bond supply was used for refinancing and for other purposes, such as repayment of credit lines.

### Change in relative attractiveness of bonds versus loans
- Controlling for a large set of firm characteristics and macro-financial variables, the analysis documents a shift toward bond financing in the United States but not in other jurisdictions (Figure 3.3, panel 5).
  - This finding suggests the Federal Reserve’s March 23 announcement of its new corporate credit facilities had a stimulative impact on domestic bond markets.
  - As of August 31, no purchases had been made on the primary markets under those facilities.
- The shift toward bond financing in the United States happened in both the investment-grade and high-yield segments, with the shift in investment-grade already visible in the first quarter, in line with record investment-grade issuance levels in March (Figure 3.3, panel 6).
- The choice between bond versus loan financing was not affected in other jurisdictions, likely partially reflecting the presence of central bank corporate bond purchase programs predating the pandemic in these economies (except in Canada).
  - The Bank of Canada announced its first corporate bond purchase program on April 15, 2020.
  - On April 9, 2020, the Federal Reserve announced the extension of the scope of its new corporate credit facilities to high-yield exchange-traded funds and bonds and loans from firms that lost their investment-grade status after March 22, 2020.

### United States market specifics
- The bond market was clearly more attractive to US firms during the second quarter in both the investment-grade and the high-yield segments.
- For the US market, the shift toward bond financing appears related to policy rather than to the weakness of banks’ balance sheets (contrast with global financial crisis experience).

### Commercial paper dynamics
- Volumes in the commercial paper market in the United States have not recovered since their sharp drop in March, despite reintroduction of the Federal Reserve’s Commercial Paper Funding Facility on March 17 and inflows resuming into prime funds.
- In the euro area, commercial paper issuance rebounded quickly from the March trough and hit a record high in June, supported by the European Central Bank’s expansion of commercial paper purchases through the Asset Purchase Programme and the Pandemic Emergency Purchase Programme.
- It appears the fall in bond market yields tempted firms to reduce refinancing risk and substitute commercial paper with longer-term debt in the United States.
- Bank of Canada and Bank of England also introduced commercial paper purchase programs; Bank of Japan stepped up its existing program.

### Total debt growth and use of proceeds
- The year-over-year growth rate of total debt of listed firms was strong, generally exceeding 10 percent, with notable contributions from credit line drawdowns in Canada and the United States during the first quarter (Figure 3.3, panel 8).
- Evidence suggests additional borrowing was used mostly to build cash reserves to cope with uncertainty and expected reduction in cash flow triggered by the pandemic shock.

### Corporate cash accumulation (selected figures)
- Listed firms’ cash flow statements for the first quarter reveal accumulation of cash and short-term investments of about 0.5 percent of assets in Japan and about 1.5 percent of assets in Canada and the United States.
- This cash accumulation contrasts with the absence of cash accumulation during the peak of the global financial crisis in the fourth quarter of 2008.
- During the second quarter, listed Japanese and US firms built cash buffers further, whereas listed Canadian firms reduced them somewhat.
- Nonfinancial corporate deposit data show a further large expansion during the second quarter, especially in France and the United Kingdom.

### Notes on data and methodology
- Panels 3 and 4: 2020 data are through end-June. Euro area refers to three euro area economies (France, Germany, Italy).
- Panels 5 and 6 show the change in the probability of issuing a bond (versus a loan) for a nonfinancial firm with characteristics equal to the sample mean during the first and second quarters of 2020 compared with before the COVID-19 crisis. Colored bars indicate significance at the 1 percent level. Empty bars indicate lack of statistical significance. See Online Annex 3.2 for methodological details.
- Panel 8 is based on data available as of August 25, 2020.
- Data as of the first half of the year are used for European Group of Seven economies to account for semiannual reporting of most firms (when first half data are not available, but first quarter data are, the latter are used).

---

### Key references in the analysis (as presented in source)
- Online Annex 3.2: methodological details for bond-versus-loan probability analysis.
- Online Annex 3.3: supply and demand system estimation for syndicated loan markets.
- Online Annex 3.4: construction of excess bond premium measure.
- Empirical comparisons and supporting literature cited in the source: Adrian, Colla, and Shin 2013; Becker and Ivashina 2014; Acharya and Steffen (2020); Gilchrist and Zakrajšek (2012); Li and others (2020); Eren, Schrimpf, and Sushko (2020); Kapan and Minoiu (2020); Moody’s Investors Service 2020; Bank of England 2020; European Central Bank 2020.

*Source: IMF Global Financial Stability Report, Chapter 3 (figures and text excerpts as provided).*

### 2020. Panel 2 shows the quarter-on-quarter change in bank lending standards from the bank lending survey conducted by re

### ch3 - 2020. Panel 2 shows the quarter-on-quarter change in bank lending standards from the bank lending survey conducted by re

### Evolution of credit supply conditions
- Bank lending survey change is shown in the form of an index ranging from –100 to 100. M = month.
- Canada, euro area economies, and the United Kingdom report a balance of opinions weighted by asset size with a base value of 0; Japan reports a balance of opinion weighted by the level of easing or tightening; the United States reports an unweighted balance of opinion in two categories by firm size (large versus small); and the figure shows the simple average of the two.
- Euro area: credit conditions eased in the syndicated loan market and remained broadly neutral in the bond market.
- Japan: conditions in the bond market tightened in March and remained slightly on the tight side in the second quarter.
- Cross-market differences likely reflect the relative strengths of policy responses, notably the scope of government-sponsored loan guarantee programs and investors’ search for yield in an environment of ultra-low interest rates and shifting expectations about future policy rates.

### Greater financial stress initially for some vulnerable firms
- Vulnerability dimensions measured at end-2019:
  - (1) small size (low total assets),
  - (2) low cash and short-term financial investments relative to industry peers (as a share of total assets),
  - (3) high short-term debt net of cash and short-term financial investments (as a share of total assets).
- Leverage-related amplification: leverage clearly amplified the effect of the COVID-19 negative cash flow shock in five of the seven economies.
- Equity performance findings:
  - Small firms’ underperformance during February–March in Germany, Japan, the United Kingdom, and the United States was close to, or greater than, 10 percentage points (cumulative abnormal returns).
  - Firms with relatively less cash suffered more financial stress in the United Kingdom and the United States.
  - Firms with a relatively higher level of short-term debt (net of cash) suffered more in France, the United Kingdom, and the United States.
  - In these five cases, the underperformance of firms with liquidity vulnerabilities between early February and end-March was about 5 percentage points.
- Definitions used:
  - Leverage = debt-to-asset ratio; high-leverage (low-leverage) = top (bottom) half of leverage distribution.
  - Low-relative-cash (high-relative-cash) = lowest (highest) tercile of the relative cash distribution.
  - Small = lowest tercile of total assets.
  - Liquidity gap = total short-term financing minus cash and short-term investments as a ratio of total assets; high-liquidity-gap = highest tercile.

### Policies that helped relieve funding stress — empirical evidence
- Analytical approaches:
  - Short window: effect of policy announcements on relative stock market performance of most vulnerable firms over a horizon of two trading days, net of extreme global volatility.
  - Longer window: relative stock market performance extended to end of June for groups that underperformed in February–March.
- Sample facts:
  - Pooling all 85 announcement days, policy announcements produced:
    - about 0.3 percentage point of overperformance a day over two days for smaller firms,
    - about 0.1 percentage point a day over two days for high-leverage firms.
  - No significant pooled effect found for firms with liquidity vulnerabilities in the aggregate short-window test.
  - Global financial market volatility defined as extreme when the Chicago Board Options Exchange Volatility Index (VIX) is above the 80th percentile of its distribution during February–June 2020.
- Policy-type heterogeneity:
  - Policies with a direct impact on corporate funding (for example, government guarantees or purchases of corporate securities by central banks) benefited liquidity-vulnerable firms relatively more than policies with only an indirect impact.
  - Estimated average effects for direct-impact announcements (over two days):
    - 0.2 percentage point a day over two days for liquidity-poor firms,
    - 0.13 percentage point a day over two days for cash-poor firms.
  - No observed difference across policy types for high-leverage firms and small firms in the pooled estimates.
- Country-specific and medium-run findings:
  - Short-window tests suggest positive effects for small firms in Canada and for small and high-leverage firms in Japan.
  - By end-June:
    - Stress at smaller firms had generally disappeared except in the United Kingdom (where it remained significant).
    - Strains in high-leverage firms persisted in Germany and Japan.
    - Stress for firms with liquidity vulnerabilities persisted in France, the United Kingdom, and the United States.

### Conclusion and policy considerations
- The tightening of credit conditions across G7 economies in March was largely quelled by an unprecedented set of policy interventions; the nonfinancial corporate sector, as a whole, was generally able to obtain funding needed to continue operating during the second quarter.
- However, some credit-market segments and some types of viable firms remained under strain—particularly bank-dependent firms and firms with pre–COVID-19 liquidity vulnerabilities in the United States, and firms with pre–COVID-19 liquidity vulnerabilities in the United Kingdom.
- Policy implications:
  - It is critical to carefully calibrate any withdrawal of fiscal policy support to funding markets, because policies supporting firms directly appeared most beneficial for liquidity-vulnerable firms and policies also cushioned strains in smaller firms.
  - A key near- to medium-term financial-stability concern is deterioration in corporate solvency from reduced profitability and increased indebtedness, which will affect banks’ asset quality and capital adequacy and could limit credit supply to firms over the next several quarters.
- Data limitations: lack of firm-level data for unlisted small and medium-sized enterprises in 2020 prevents establishing the degree to which conclusions carry over to those firms.

*International Monetary Fund | Chapter 3 (excerpt) — GLOBAL FINANCIAL STABILITY REPORT: BRIDGE TO RECOVERY, October 2020*

### Chapter 1 of this report provides a policy road map

### Chapter 1 of this report provides a policy road map

### Policy road map for reopening and recovery
- Provides a policy road map to navigate the gradual reopening and the recovery phases of the COVID-19 crisis (see Table 1.2 in that chapter).
- Discusses policy trade-offs relevant to corporate funding issues documented in this chapter, including:
  - the impact on fiscal space and sovereign contingent liabilities
  - the risk of capital misallocation

### Lessons for corporate funding markets and regulation
- Once the recovery is well entrenched, the experience of the COVID-19 shock on corporate funding markets must be examined to determine the reasons for the fragility experienced in March.
- The regulation of nonbank financial institutions must be revisited.
- Mechanisms to enhance nonbank resilience to large liquidity shocks should be devised, consistent with discussions in recent Global Financial Stability Reports.

### Vulnerabilities and supervisory implications
- Evidence indicates that liquidity and leverage-related vulnerabilities amplified the impact of the COVID-19 shock.
- The crisis experience is a reminder to supervisory authorities to continue to monitor corporate vulnerabilities closely.
- The experience offers an opportunity for authorities to consider the benefits of macro‑prudential policy tools for the nonfinancial corporate sector (IMF 2020).

*Source: ch3 - Chapter 1 of this report provides a policy road map*

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_Source: https://www.imf.org/-/media/files/publications/gfsr/2020/october/english/ch3.pdf_