The Financial Stability Board (FSB) published a discussion paper on approaches to the debt overhang issues of non-financial corporates in the context of the COVID-19 pandemic. The discussion paper aims to gather views, from public, on the practical extent of debt overhang issues in a post COVID-19 environment. It also aims to facilitate a dialog 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. FSB is requesting feedback on the discussion paper by April 08, 2022.
The discussion paper looks at debt overhang issues from three angles: assessing companies’ viability in the context of COVID-19, facilitating and incentivizing timely restructuring and refinancing of the debt of viable companies and ways to facilitate exit of unviable companies, and dealing with a large number of companies with debt restructuring needs, with focus on small and medium-size enterprises (SMEs) and micro companies. The discussion paper refers to several examples of policy approaches in place in FSB member jurisdictions to date and emerging industry practices. These include the systematic classification of distressed companies and standardized restructuring solutions, mobilization 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. FSB welcomes comments on the discussion paper and the questions set out below:
- 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 incentivized or supported?
- How can governments and financial authorities create favorable 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 favorable conditions be created to incentivize investors to provide new financing to distressed but viable companies—for example through equity capital and particularly 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?
Keywords: International, Banking, COVID-19, Credit Risk, SMEs, Resolution Plan, Debt Restructuring, Debt Overhang, Lending, Financial Stability, Basel, FSB
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