IMF Reports Record-High Corporate Financial Stress

The International Monetary Fund (IMF) released its October 2019 Edition of the Global Financial Stability Report (GFSR): Lower for Longer to detail macroeconomic developments and vulnerabilities to the global financial system. Of the key vulnerabilities identified by the IMF, the No. 1 risk to the global financial system is rising corporate debt burdens

As stated in the report’s Executive Summary, “corporate sector vulnerabilities are already elevated in several systematically important economies as a result of rising debt burdens and weakening debt service capacity. In a material economic slowdown scenario, half as severe as the global financial crisis, corporate debt-at-risk (debt owned by firms that are unable to cover their interest expenses with their earnings) could rise to $19 trillion — or nearly 40% of total corporate debt in major economies—above crisis levels.” CreditRiskMonitor’s proprietary FRISK® score delivers 96% accuracy in prediction of nonfinancial corporate bankruptcies with enough lead-time to affect your company’s dollar-at-risk exposure.

Within the IMF report, the table "Nonfinancial Sector Vulnerabilities" on pg. 9 shows significant exposures within corporate debt across eight developed economies. For example, China’s total speculative-grade debt (defined as net debt-to-assets exceeding 25%) and debt-at-risk (an interest coverage ratio below 1x) is an estimated 75% of GDP in 2019. Other economies have relatively lower amounts, between 20% and 50% of GDP, but still very high absolute levels:

CreditRiskMonitor is a B2B financial risk analysis platform designed for credit, supply chain, and other risk managers. Our service empowers clients with industry-leading, proprietary bankruptcy models including our 96%-accurate FRISK® score for public companies and 70%-accurate PAYCE® score for private companies, and the underlying data required for efficient, effective financial risk decision-making. Public company coverage comprises more than 57,000 businesses worldwide, totaling $69.3 trillion in corporate revenue compared to global GDP of $85.9 trillion. Additionally, private company coverage includes information on millions of businesses the world over. Thousands of corporations around the world – including more than 35% of the Fortune 1000 – rely on our expertise to help them stay ahead of financial risk quickly, accurately, and cost-effectively.

Nonfinancial Sector Vulnerabilities
Nonfinancial Sector Vulnerabilities shows the enormous exposure as a percentage of GDP across eight developed economies to low-quality/high-risk nonfinancial corporate debt. For example, China’s total speculative-grade debt and debt-at-risk is an estimated 75% of GDP in 2019. From 2009 to 2019, Chinese GDP has grown 108% meaning that high-risk nonfinancial corporate debt grew by 290% to go from making up 40% of GDP in 2009 to 75% of GDP in 2019. Therefore, Chinese high-risk nonfinancial debt has grown at roughly 2.7x the GDP over this period.

The IMF also detailed on pg. 28 that while debt-at-risk has trended lower in some geographies, the number of public companies where interest expenses exceed operating profit (or EBIT) is already elevated. As the chart below depicts, the U.S. is among the most at risk, with more than 60% of small-medium U.S. enterprises having interest coverage ratios below 1X:

EBIT-to-Interest Ratios
While nonfinancial corporate debt-at-risk has trended lower in some geographies, the percentage of public companies where interest expenses exceed operating profit (or EBIT) is still concerning. As the chart below depicts, the U.S. is among the most at risk, with more than 60% of small-medium U.S. enterprises having interest coverage ratios below 1X.

U.S. corporate capital structures also continue to steadily deteriorate, as seen on pg. 32: “payouts – dividends and share buybacks – at U.S. large firms have grown to record high levels in recent quarters…smaller firms have increasingly used leveraged loans and high-yield bonds to fund payouts to boost investors’ returns.

In an economic downturn, net profitability across nearly all industries will decline and public companies with excessive financial leverage will face extreme financial distress, defaults, and bankruptcies. 

Prepare For Risk Now

CreditRiskMonitor anticipates historically high numbers of defaults and bankruptcies in the next economic downturn. Based on figures gathered from the Federal Reserve and NYU Salomon Center, U.S. non-financial corporate debt has reached a record 47% of GDP as of August 2019. Using historical average default rates (~12%) following large expansions of non-financial corporate debt, CreditRiskMonitor estimates that total losses from public company junk debt and leveraged loans could exceed $1.1 trillion:

Global debt is higher than it's ever been, driven by historically low interest rates.
Source: NYU Salomon Center and Federal Reserve Bank of St. Louis.

While the above picture describes the U.S. environment, this is a contagion that is present globally. For example, China’s total speculative-grade debt and debt-at-risk is 75% of GDP, which means that Chinese junk-equivalent debt equals ~$10.5 trillion based on reported 2019 GDP estimates of $14 trillion. The sheer size of this debt exposure is staggering, but when paired with declining growth and reduced government bailouts is downright terrifying.

CreditRiskMonitor’s 96%-accurate FRISK® score coverage spans more than 56,000 public companies worldwide, including 4,000-plus U.S. companies and 6,500-plus in China and Taiwan combined. The FRISK® score is based on a “1” (highest risk)-to-“10” (lowest risk) scale, with scores between “5” and “1” defined as FRISK® “red zone.” Companies in the red zone are experiencing material financially stress and have higher-than-average bankruptcy risk. Red zone companies demand immediate attention.


The FRISK® score leverages information from four key categories of data – stock market capitalization and volatility, financial ratios, bond agency ratings and crowdsourced CreditRiskMonitor subscriber usage/sentiment – to achieve its 96% accuracy in prediction of public company bankruptcy risk. 

CreditRiskMonitor also provides a timely news service, financial statement spreads, ratio analysis, and public filings including bankruptcy petitions, judgements, and tax liens, among other data resources. The CreditRiskMonitor service can help you get and stay ahead of the massive risks identified by the International Monetary Fund.

Bottom Line

In the next economic downturn, highly leveraged public companies will become increasingly distressed and file for bankruptcy. Whether you are a professional in credit, finance or supply chain management, it is imperative to prepare today for what may come tomorrow. More than 35% of the Fortune 1000 currently use the FRISK® score and other tools to stay ahead of corporate financial risk and bankruptcy. Join the smart money today and count yourself among the prepared. For more information and a demonstration, call us at 845.230.3000 or contact us here.