Leverage firms not yet out of danger of bankruptcy, newspaper warns

“A great wave of bankruptcies was expected. So far, however, insolvencies have remained very low and even declined in many jurisdictions in 2020, ”the report says.

Although this was a pleasant surprise, “it may be too early to rule out future credit risk,” the newspaper warned.

“Significant increases in leverage and weak earnings forecasts in some sectors suggest that for some companies, a larger credit extension may have only postponed, rather than canceled, their insolvency,” BIS said. .

Indeed, the document said that the single most important factor explaining the disparity between expected and actual bankruptcy figures is the provision of exceptional monetary and fiscal support that has ensured sufficient credit to keep businesses afloat.

“This has been essential in preventing insolvencies because it is ultimately insufficient cash flow that leads to bankruptcies,” the newspaper said.

However, the increase in credit that has prevented short-term bankruptcies has raised debt levels, which could pose problems over time.

For example, the document said that a “worrisome scenario” involves a combination of higher debt levels and depressed profits for companies in hard-hit sectors – such as the airline, hospitality, food and beverage industries. catering and recreation – which would leave these businesses “heavily dependent on additional support to avoid insolvency.”

“These risks could be worsened if vaccines are less successful in containing the spread of Covid-19,” noted the BIS. “The prolonged weakness in these sectors could in turn spill over into the more leveraged commercial real estate sector. “

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