Miniature of business men observing maze risk concept

Government responses to the economic turmoil inflicted by the Covid-19 pandemic have prevented waves of bankruptcies, but now policymakers are starting to mull over how to deal with the large increase in corporate debt.

The Financial Stability Board (FSB) issued a discussion paper that examines approaches to dealing with the high levels of debt at non-financial companies that’s largely due to government support provided in response to the pandemic.

A previous report from the FSB on post-pandemic issues identified debt overhang as a “significant risk” that could hamper the economic recovery due to the possibility that resources are misallocated to companies that aren’t viable, that sound companies suffer from under-investment, and that productivity suffers due to a reduction of entrepreneurial capacity.

“There might also be a risk of widespread defaults and insolvencies, giving rise to financial stability risks,” it said.

The paper looks at how to assess companies’ viability amid pandemic supports, how to facilitate the exit of distressed companies and the refinancing of viable ones, and how to deal with a large number of companies that need to restructure their finances (particularly smaller firms that may not have access to capital markets).

“The discussion paper aims to gather views from the public on the practical extent of debt overhang issues in a post Covid-19 environment and to facilitate a dialogue 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,” the FSB said.

The paper also considers policies that have been adopted in certain markets already, including the systematic classification of distressed companies and standardized restructuring solutions; approaches to facilitating private sector involvement; and speeding up restructuring procedures for smaller companies.

The deadline for responses to the paper is April 8.