Debt & Firm Vulnerability Jack Glen IFC March 2004.
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Transcript of Debt & Firm Vulnerability Jack Glen IFC March 2004.
![Page 1: Debt & Firm Vulnerability Jack Glen IFC March 2004.](https://reader035.fdocuments.net/reader035/viewer/2022062413/5a4d1b5b7f8b9ab0599ab263/html5/thumbnails/1.jpg)
Debt & Firm VulnerabilityJack GlenIFCMarch 2004
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Why Do Firms Get into Trouble? Poor Management Technological Innovation Market Competition Demand Declines
Business Cycle Crisis
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Problem: Fixed Debt Service FX Denominated Debt
• Mismatched Revenues/Expenses• FX Impact on Demand
Short-Maturity Debt• Inability to Roll-over• Interest rate volatility
Demand Declines• Interest Coverage
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How to Measure Leverage? Aggregate Measures
External Debt Ratios Consumer Debt Component
Firm-Level Measures Accurate, but what to Count? Reveals Distribution of Exposure Ability to Service Debt Varies
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Excess Leverage?
0
20
40
60
80
100
120
140
East Asia andPacific
Europe andCentral Asia
Latin America andCaribbean
1995 1997 2001
Percentage of GDP
Domestic Bank Credit
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Excess Leverage?Spot the Emerging Market CountryMedian, Total Liabilities/Total Assets
00.10.20.30.40.50.60.70.8
1994 1995 1996 1997 1998 1999 2000 2001
IrelandMalaysia
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Declining East Asian Debt LevelsTotal Liabilities/Total Assets, Median
0.40
0.45
0.50
0.55
0.60
0.65
0.70
0.75
1995 1996 1997 1998 1999 2000 2001
KoreaThailandNetherlands
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Korea: Total Liabilities/Total Assets% of Companies
0%5%
10%15%20%25%30%35%
TL/TA %
20001995
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Short-term Debt Vulnerability?Current Liabilities
0
10
20
30
40
50
60
70
80
East Asia Latin America Europe and CentralAsia
1995
1997
2001
Percentage of Total Liabilities
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Too Much Short-Term Debt?Median Current Liabilities/Total AssetsOECD, Low Middle & Upper Middle Income Countries
0.200.220.240.260.280.300.320.340.36
1994 1995 1996 1997 1998 1999 2000 2001
LMIUMIOECD
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Too Much Short-Term Debt?Spot the Emerging Market CountryMedian, Total Current Liabilities/Total Assets
0.000.050.100.150.200.250.300.350.400.45
1994 1995 1996 1997 1998 1999 2000 2001
ArgentinaJapan
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Excess External Leverage?Corporate foreign debt
0
5
10
15
20
25
30
35
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Percentage of GDP
Latin America and the Caribbean
East Asia and Pacific
Europe and Central Asia
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Private Flows to Emerging Markets$ Billions
-50
0
50
100
150
200FDI
Portfolio
Debt
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East Asian Corporate BorrowersLT Debt/Total Debt,Firms with FX Debt & with no FX Debt
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
No FX DebtFX Debt
Allayanis, Brown & Klapper (2003)
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How Does Foreign Debt Impact Results?Allayanis, Brown & Klapper (2003)
Foreign debt no worse than local debt for stock prices & interest coverage
FX debt is used because it is longer tenor FX debt is used most when FX sales are
available
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Cash Flow and Interest CoverageGlen (2004)
Cash Flow Volatility Business Cycle Currency Depreciation Interest Rate Increases
ICR=EBITDA/Interest Expense What is impact of these factors on
ICR?
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The Data
Osiris 41 Countries 1994-2001 Manufacturing
7 Sectors 44,424 Firm Years
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Interest Coverage RatioAll Countries & Firms, EBITDA/Interest Expense, 2000
0.0
2.0
4.0
6.0
8D
ensi
ty
-50 -40 -30 -20 -10 0 10 20 30 40 50ICR
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Interest Collection RateBrazil, All Firms (149), 2000
0.0
5.1
.15
.2.2
5D
ensi
ty
0 5 10 15ICR
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ThailandInterest Coverage Ratio (Median),GDP Growth (%) & Interest Rates (%)
-15
-10
-5
0
5
10
15
20
1994 1995 1996 1997 1998 1999 2000 2001
ICRGDPInt Rate
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The Findings Significant Business Cycle Effect
• -5% ΔGDP –1 Δ ICR Significant Sector Differences
• General Manufacturing Hit Hardest Significant Interest & Inflation
Effects• Both Negative & Economically Large
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Developed and Emerging Markets Better fit for Emerging Markets GDP impact same DM sensitive to Inflation EM sensitive to Interest Rates
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Impact of a 5% Decline in GDPAll Countries & Firms, EBITDA/Interest Expense, 2000
0.0
2.0
4.0
6.0
8D
ensi
ty
-50 -40 -30 -20 -10 0 10 20 30 40 50ICR
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Turnover & Margins
Returns correlated with Business Cycle
Margin Effects Hard to Discern Turnover Effects Strongly Negative
sTotalAssetSalesx
SalesEBITDA
sTotalAssetEBITDA
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Conclusions Debt Service a major source of
Vulnerability Business Cycle Impacts Significant Measuring Vulnerability
Product Market Volatility Sensitivity to Business Cycle Does Market Structure Permit a
Management Response?