Restoring corporate balance sheets will take time: Fitch

The Covid-19 outbreak has caused a ramp up in corporate leverage, which is expected to take at least a couple of years to unwind, according to Fitch Ratings.

In a new report, the rating agency said that “the pandemic is having a leveraging effect” on North American companies.

Firms have suffered reduced cash flow due to lockdowns subduing economic activity. At the same time, they have increased debt issuance to shore up their liquidity during the outbreak, Fitch said.

“Under our baseline scenario deleveraging to pre-coronavirus levels could take at least two years,” Fitch said.

That scenario assumes that most sectors see “a very sharp contraction” in the second and third quarter of 2020, with “improvement, but not entirely back to pre-crisis levels, immediately after lockdowns are lifted.”

Once economic activity resumes, companies will be able to start paring back their leverage, through a combination of debt reduction and resurgent cash flows, Fitch noted.

“We anticipate deleveraging will be driven by a combination of EBITDA growth, as revenue trends improve and issuers benefit from cost reductions, and debt repayment as some companies repay debt taken on during the crisis,” by the end of 2021 or 2022, the rating agency said.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.