FSB seeks views on policy approaches and market practices to support a smooth transition out of debt overhang issues
22 February 2022
The Financial Stability Board (FSB) today published a discussion paper 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.
The FSB welcomes comments on this Discussion Paper and the questions set out below.
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How do creditors or investors assess the viability of a company
in the current environment, given the possible transformation of
business environment and consumption patterns following the COVID-19
crisis, and considering a need to swiftly process a high number of (re-)
assessments as government support measures phase out?
-
What type of market-led mechanisms can help determine corporate
viability? How could such market-led mechanisms for conducting due
diligence be incentivised or supported?
-
How can governments and financial authorities create favourable
conditions to provide incentives for lenders and debtors to engage in
corporate debt restructurings and to allow market exit of non-viable
companies in a timely fashion?
-
Is there likely to be a need to swiftly process a high number of restructurings as government support measures phase out?
-
How can favourable conditions be created to incentivise investors
to provide new financing to distressed but viable companies, for
example through equity capital and in particular for SMEs? What other
(new) forms of market-based financing may be used to address debt
overhang issues and how?
-
How can public policy support private sector financing for a
smooth transition out of the debt distress post COVID? Which forms of
public-private partnerships can be considered effective, and under what
conditions?
Responses should be sent to fsb@fsb.org
by Friday 8 April 2022 with the subject line “Approaches to Debt
Overhang Issues of Non-Financial Corporates”. Responses will be
published on the FSB’s website unless respondents expressly request
otherwise.
FSB
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