The COVID-19 Impact on Corporate Leverage and Financial Fragility

IMF Working Papers, November 5, 2021

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Canonical URL: The COVID-19 Impact on Corporate Leverage and Financial Fragility

Leverage (Net Debt/Asset) decreased by 5.3 percentage points from the pre-shock mean of 19.6 percent.
Debt maturity increased moderately.
The de-leveraging effect is stronger for firms exposed to significant rollover risk.
Firms whose businesses were most vulnerable to social distancing did not reduce leverage.
Firms which did not de-lever became over-leveraged according to model-implied optimal leverage.

A structural model of firm value is used to rationalize the empirical evidence.
The model shows that lower expected growth rate and higher volatility of cash flows following COVID-19 reduced optimal levels of corporate leverage.
Model-implied optimal leverage identifies firms that are over-leveraged when observed leverage did not fall.

Default probability deteriorates most in large, over-leveraged firms and those that were stressed pre-COVID.
Additional stress tests predict value of these firms will be less than one standard deviation away from default if cash flows decline by 20 percent.

Pages: 51
Issue: 265
Series: Working Paper No. 2021/265
DOI: https://doi.org/10.5089/9781589064126.001
Subjects: Asset and liability management; Asset valuation; Business enterprises; COVID-19; Credit risk; Currencies; Economic sectors; Financial regulation and supervision; Health; Money
Keywords: Asset valuation, asset volatility, Business enterprises, business risk, Corporate Debt, COVID-19, Credit risk, Currencies, debt maturity, default probability, Default Risk, Distance-To-Default, Global, impact of the COVID-19 recession, model-implied optimal leverage, Optimal Capital Structure, over-leveraged firm, Rollover Risk, Stress Tests

Source: The COVID-19 Impact on Corporate Leverage and Financial Fragility, IMF Working Papers (Working Paper No. 2021/265).