The extraordinary policy response by public authorities has been key to limiting the economic fallout of the COVID-19 pandemic. At the same time, the massive public credit provision (both directly and through loan guarantees) has resulted in an unprecedented level of debt of non-financial companies.

Debt overhang of non-financial companies could create a drag on economic recovery of jurisdictions and pose risks to the financial stability through:

  • underinvestment by viable companies due to excessive indebtedness;

  • misallocation of resources to unviable companies; 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.

This discussion paper looks at debt overhang issues from three angles:

  1. assessing companies’ viability in the context of COVID-19;

  2. facilitating and incentivising timely restructuring and refinancing of the debt of viable companies and how to facilitate exit of unviable companies; and

  3. dealing with a large number of companies with debt restructuring needs, with a particular view to small and medium-sized enterprises (SMEs) and micro companies.

This Discussion Paper discusses debt overhang issues by exploring some of the specific challenges in a COVID-19 or post COVID-19 environment and it refers to several examples of policy approaches put in place in FSB member jurisdictions to date and emerging industry practices.

The FSB invites comments on this Discussion Paper and the questions set out below.

  1. 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?

  2. 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?

  3. 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?

  4. Is there likely to be a need to swiftly process a high number of restructurings as government support measures phase out?

  5. 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?

  6. 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 [email protected] 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.