The Financial Stability Board (FSB) has published a discussion paper on February 22nd on debt overhang issues of non-financial corporates in the context of the COVID-19 pandemic. This follows the FSB’s report on COVID-19 support measures, published in April 2021, which noted the unprecedented level of debt of non-financial companies, resulting largely from massive credit provision by the public sector (both directly and through loan guarantees) during the pandemic. The report identified debt overhang as a significant risk that could arise from prolonged policy support measures.
Debt overhang of corporates could create a drag on economic recovery of jurisdictions and pose risks to financial stability through: underinvestment by viable corporates due to excessive indebtedness; misallocation of resources to unviable corporates, and lower productivity due to loss of entrepreneurial capacity. There might also be a risk of widespread defaults and insolvencies, giving rise to financial stability risks. Moreover, there is an inherent interconnection between the soundness of lenders and sovereigns.
The discussion paper looks at debt overhang issues from three angles: (i) how to assess companies’ viability in the context of COVID-19; (ii) how to facilitate and incentivise timely restructuring and refinancing of the debt of viable companies and how to facilitate exit of unviable companies; and (iii) how to deal with a large number of companies with debt restructuring needs, focusing in particular on small and medium-sized enterprises (SMEs) and micro companies. It refers to several examples of policy approaches put in place in FSB member jurisdictions to date and emerging industry practices. These include the systematic classification of distressed companies and standardised restructuring solutions; mobilisation of private sector resources by building private-public co-funds or by supporting banking sector code of conducts; and speeding up restructuring procedures that involve SMEs.
The discussion paper aims to gather views from the public on the practical extent of debt overhang issues in a post COVID-19 environment and to facilitate a dialogue between financial authorities and external stakeholders, including financial institutions, restructuring experts and borrowers, on emerging policy approaches and market practices that could prove effective to support a smooth transition out of debt overhang issues.
Source: FSB
