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

IMF Working Papers, November 13, 2020

Source details

Sample: 755 firms.
Aggregate indebtedness analyzed: US$6.2 trillion.
Assessment based on projections of net income, availability and cost of funding, and debt servicing flows under different stress test scenarios.
Focus on solvency risks and liquidity needs of the U.S. corporate sector.

Leveraged corporates account for most of the potential losses arising from the macroeconomic stresses associated with the COVID-19 crisis.
Loss concentration by sector:
- Oil and gas.
- Auto.
- Capital and durable goods manufacturing.
Potential losses from corporate debt write-downs appear to be a fraction of banks’ capital buffers.
Given the size of the leveraged segment and the relatively long duration of that sector’s debt, near-term liquidity needs of these corporates appear modest.
Corporate stresses could amplify the current economic downturn as firms cut investment spending and reduce employment, potentially giving rise to significant indirect losses for the financial system.

Direct solvency losses on corporate debt are limited relative to banks’ capital buffers, reducing immediate banking-sector solvency concerns.
Indirect channels—reduced investment and employment from stressed corporates—pose material risks to the broader economy and could generate significant secondary financial-sector losses.
Monitoring leveraged corporates in the specified high-risk sectors is critical to containing amplification effects on the real economy and financial system.