The pandemic has severely impacted the global economy and financial risk profile of many corporate debt issuers. KBRA believes the slowdown in economic activity will translate into the lowest growth in global GDP in over 30 years, as world economies deal with shuttered businesses and regional quarantines.
The impact of these aggressive population isolation strategies will be widespread, and many companies could experience financial distress. Some companies have already started to plan for the slowdown by drawing on unused bank lines and revolvers. This seems to be a prudent strategy given the current market landscape, as it allows these companies to deal with short-term liquidity issues. However, this may increase the debt burden of these companies, which could result in higher default risk over the longer term as debt service obligations increase. The daily ramifications of the virus are ever-changing, with the seemingly outsized reactions throughout the global capital markets.
While it is impossible to forecast when and how the current situation will be resolved, there are certain data points that may provide an early indication of the health of the corporate debt market and individual issuers.
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