COVID-19 and the corporate sector liquidity
8 May 2020
On 28th of April, the Bank for International Settlements published a report regarding Coronavirus and corporate sector liquidity.
The key takeaways of the report are the following:
- The Coronavirus crisis has tremendous impact on corporates cash buffers. Corporate financial statements from 2019 indicate that 50% of the companies do not have sufficient cash to cover total debt servicing costs over the coming year;
- Credit lines could provide firms with additional liquidity. On average, undrawn credit level was around 120% of debt servicing costs at the end of 2019. However, access is uneven and banks may be reluctant to renew or extend them in the current environment;
- Operating expenses result in many firms undergoing operating losses, placing an additional burden on cash buffers. Estimates show that following a 10% fall in revenues, operating expenses only drop by 6% on average;
- Simulations suggest that if revenues fall by 25% in 2020, then closing the entire funding gap with debt would raise firm leverage by around 10 p.p.
This article provides further insight on highlights from the report.