A stress test conducted by S&P Global Ratings has found that up to 12 per cent of companies worldwide could be loss-makers in 2023 compared to 7 per cent in 2021.
Following a 300 basis point (bp) interest rate rise, 10 per cent of the over 24,000 non-financial corporates analysed by S&P Global Ratings would be loss-makers by 2023.
“Our stress scenario for a 300bp interest rate hike only assumes that rates would return to the levels that prevailed before the global financial crisis,” said S&P Global Ratings senior research fellow Terry Chan.
“Yet, we find that this increase would significantly alter the financials of corporate issuers.”
If interest rates and inflation both rise by 300bp under a “twin-shock” scenario, the ratio of loss-makers would be even higher at 12 per cent.
“Persistent inflation, tied to supply chain disruptions and energy prices, could trigger wage inflation and push the Fed and other central banks to hike rates faster. This could trigger market volatility, amplified by elevated debt levels," said S&P Global Ratings head of North America credit research David Tesher.
China was found to be the most sensitive to the scenarios tested by the firm, which indicated the proportion of loss-makers could more than double from 7 per cent in 2021 to 15 per cent in 2023.
Australia’s already high loss-maker ratio of 11 per cent would also reach 15 per cent in 2023 under the “twin-shock” scenario.
“Its high loss-maker ratio is caused by a single large borrower – a government-related telecommunications company that has recorded a large, negative FFO for a decade,” explained S&P Global Ratings.
“Excluding it would reduce the ratio to 7 per cent, more in line with other developed countries.”
The sectors that would face the biggest increases in loss-makers due to rising inflation and interest rates are retail and restaurants as well as engineering and construction, according to S&P Global Ratings.
With nearly 60 per cent of the retail and restaurant sector determined as having a high credit risk, the ratio of loss makers would rise from 6 per cent in 2021 to 20 per cent in 2023.
Eighty per cent of the engineering and construction sector is in the high-risk tier, with the loss-maker ratio potentially rising from 9 per cent in 2021 to 22 per cent in 2023.
More loss-makers would also be recorded in transportation and infrastructure, real estate, oil and gas equipment, consumer products, oil and gas refining, and media and entertainment.
In 2021, S&P Global Ratings has projected 37 per cent of the transportation cyclical sector and 30 per cent of the leisure sector will be loss-makers due to the impacts of the COVID-19 pandemic.
Under the “twin-shock” scenario, the ratio in 2023 would increase to 43 per cent for the transportation cyclical industry and 34 per cent for leisure.
Jon Bragg
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.
