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Q&A Credit Risk Perspective Series: Macro-Economic Impact During COVID-19

The current pandemic will affect the way financial institutions lend and manage credit risk. Luka Vidovic, Associate Director of Quantitative Modelling in the Analytical Development Group (ADG) discusses the macro-economic impacts of a pandemic and assesses the potential credit risk impacts for private and public companies across various industries.

The following questions have been addressed from our webinar hosted on May 13, “Coronavirus Insights: An Impact on Corporate Credit Risk.”[1]

Which industry sectors could see a positive effect of COVID-19?

Based on our analysis[2], industries with very small credit risk impact are pharmaceuticals and health care. However, some companies in other industries are well-positioned to increase their revenues. For example, food retailers or online video streaming companies might see an increase in demand and better financial performance. In a medium- to long-term, it is also important to take into account changes in consumer behaviour and incorporate them into the analysis.

How long on average could companies withstand an economic downturn?

Based on historical data and our experience, the effect of adverse market shocks will be disproportionately larger for companies that entered this crisis with lower credit scores. The resilience of a specific company depends on the characteristics of the industry and the severity and duration of market shock. In the current downturn, we see liquidity as an important factor affecting the creditworthiness of companies.

Which leading metrics can use creditors (e.g. banks) to predict problems with their clients?

Our statistical models offer insight into credit risk drivers and sensitivity of credit score to changes in underlying financials. In the current environment, liquidity, debt maturity profile, and operational flexibility are important factors driving the assessment of creditworthiness.

Do you have a sensitivity model that shows what happens if the economy recovers at different pace (better vs worse)?

Since the impacts can be non-linear, it is prudent to analyze various macroeconomic scenarios to gauge the potential outcomes. Our Credit Analytics Macro Scenario Model from S&P Global Market Intelligence enables analysis of multiple macro-economic forecasts to assess the creditworthiness of companies under different economic recovery scenarios.

  

Luka VidovicLuka Vidovic

 

Luka Vidovic is an Associate Director of Quantitative Modelling in the Analytical Development Group (ADG). Luka focuses on quantitative research and development of credit risk analytics. Prior to joining S&P Global Market Intelligence, Luka worked in Central bank of Slovenia in the Risk Management Department. He has experience in market risk, credit risk, and portfolio analytics. Luka holds a PhD in Physics, Masters in Finance, and is a Certified FRM.

 Lear more about Credit Analytics Macro Scenario Model here

 

[1] Webinar: Coronavirus Insights: An outlook on corporate credit risk. S&P Global Market Intelligence. Date: 13 May, 2020

[2] The Outlook For Corporate Credit Risk; COVID-19 Pandemic And Macroeconomic Scenarios. S&P Global Market Intelligence. Date: 11 May, 2020

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