BIS: Covid-19 And Corporate Sector Liquidity

Key takeaways

• The Covid-19 shock is placing enormous strains on corporates cash buffers. Corporate financial statements from 2019 suggest that 50% of firms 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 stood around 120% of debt servicing costs at end 2019. However, access is uneven and banks may be reluctant to renew or extend them in the current environment.
• Sticky operating expenses result in many firms running operating losses, placing an additional burden on cash buffers. Estimates indicate that following a 10% drop in revenues, operating expenses only fall 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 percentage points.

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