Credit market tensions likely in coming years: BIS

BASEL

The business credit market may witness tensions in the coming years, the Bank for International Settlements (IBS) has said, warning that small businesses were notably vulnerable to refinancing at higher rates.

During the phase of exceptionally low interest rates, many companies borrowed under favourable conditions and built up liquidity cushions so they can avoid having to refinance at the currently high borrowing rates, said BIS, considered the central bank of central banks, in its quarterly report.

"Tensions in corporate credit markets may lie ahead," BIS said in a report.

"A substantial amount of debt will become due in the next few years and will need to be refinanced at significantly higher rates. Small corporates are particularly vulnerable to such a scenario."

The institution reviewed 83,000 debt instruments issued by more than 18,000 companies in 53 countries, to assess debt rollover needs.

Within four years, many small businesses will have debts that are maturing and will have to be refinanced "in excess of 10 percent of total annual revenues and over four times annual earnings,” according to the BIS report.

If refinancing needs are less marked in the short term for medium-sized enterprises, they too will rise to around 10 percent of annual revenues and 40 percent of their gross operating surplus by 2026.

The refinancing needs of large firms are lower, at around three percent of annual revenues and only 20 percent of their gross operating surplus.

"We are at a stage where inflation is coming down. Now looking forward, the challenges central banks have is basically to decide what to do next," said Claudio Borio, head of the BIS monetary and economic department.

Because the evolution of inflation is uncertain, "we are not out of the woods yet", Borio said.