VoxEU Column COVID-19

Covid-19 and the corporate sector: Where we stand

The Covid-19 crisis has had a largely negative effect on firms, harming corporate profitability and leverage around the world. This column presents findings from the recent OECD Economic Outlook, highlighting how these negative effects have in fact varied across firms. In maintaining the buffer against corporate bankruptcies, the authors identify three clear policy challenges: debt overhang, financial instability, and the rise of ‘zombie’ firms.

The Covid-19 crisis has affected firms all over the world. While it is too early to assess its full impact, some important lessons can already be learned. This column summarises findings published recently in the OECD Economic Outlook (OECD 2021), based on a large sample of non-financial companies operating in OECD countries and major non-OECD emerging-market economies.1 It shows that the impact of the Covid-19 shock on firms’ profitability and leverage has been highly heterogeneous. Policy support has been effective in preventing a wave of corporate defaults, but policymakers will face three challenges in the medium term: the debt overhang problem, the financial stability implications of the rapid debt build-up, and the rise of so-called ‘zombies’.  

The peculiar nature of the Covid-19 shock

As expected, the Covid-19 shock has had a largely negative impact on corporate profitability and leverage around the world. Revenues and profits dropped by 2% for the median firm, debt and leverage ratios increased, and the interest coverage ratio (or ICR), a key solvency metric, declined by roughly two percentage points. But this general picture conceals significant heterogeneity, with both winners and losers (Figure 1). Revenues and profits dropped between 30% and 50% for firms operating in the energy sector, reflecting depressed oil prices during most of 2020, as well as in contact-intensive consumer services, such as hotel and restaurant chains, casinos and gaming, and cruise lines. The income shock was also sizeable in the transportation and automobile sectors. In contrast, firms operating in software services, pharmaceuticals, healthcare, or retailing expanded substantially in fiscal year 2020, both in terms of revenues and profits. 

In contrast to other recessions, financial stress has been contained due to prompt and effective monetary and fiscal policy support. In spite of the strength of the Covid-19 shock, the number of firms ‘in distress’ – measured by the share of firms with either negative equity or an interest coverage ratio below one – has remained stable in the sample.2 This finding is in line with the general slowdown in bankruptcies among both large and small firms observed in OECD countries (Djankov and Zhang 2021). In fact, the number of bankruptcies has remained lower than in the global crisis, and, in some advanced economies, it was even lower than in the years preceding the pandemic. The stark contrast with the global crisis can also be seen in how ‘risky’ firms navigated the global crisis and the Covid-19 pandemic (Figure 2). During the global crisis, the riskiest firms in hard hit sectors experienced both a reduction in their access to credit (or debt) and a steep shortening of their debt maturity structure. During Covid-19, the same firms managed to raise a substantial amount of debt, without incurring any change in debt maturity, even though they faced a revenue shock of similar magnitude.

Figure 1 Changes in revenues and profits between FY 2019 and FY 2020, by sector


Note: Profits are measured using earnings before interest, taxes, depreciation and amortisation (EBITDA). Results are reported for the median firm for each indicator and weighted by the firm’s asset size in 2019. 
Source: S&P Capital IQ; and author’s calculations.

Figure 2 ‘Risky’ firms fared better in the COVID-19 crisis than in the global crisis


Note: Firms are defined as “risky” if their ICR in 2019 was in the bottom tercile of their respective industry and if they belong to a hard-hit sector. A hard-hit sector is defined as an industry that lost, on average, more than the median industry. 
Source: S&P Capital; and author’s calculations.

Challenges ahead

It is too early to tell whether this relatively benign picture will persist. The sample of firms for which up-to-date financial information is available currently tilts towards medium-sized and large firms. These firms tend to have sizeable financial buffers and a stable access to credit. A complete picture will be available only once smaller (and more fragile) firms, which account for the bulk of the employment in OECD countries and are over-represented in contact intensive industries, report their financial statements. Three important challenges are also likely to emerge in the medium term. 

1) Debt overhang and investment

Debt overhang is a key source of concern. High corporate debt tends to reduce investment in the aftermath of economic crises, with negative implications for the recovery. For medium-sized and large firms, the aggregate level of capital expenditures decreased by almost 7% in FY 2020 compared to FY 2019 (Figure 3). Investment in sectors that were hit hard (such as energy, consumer services, and transportation) contracted drastically. In contrast, firms operating in healthcare equipment, utilities, software services, telecommunications, and pharmaceuticals expanded capital expenditures. On average, a percentage point increase in the equity (asset) leverage ratio between 2019 and 2020 was associated with a 2% (5%) drop in capital expenditures, suggesting that the persistence of a debt build-up strategy will ultimately weigh on investment in the medium term.3

Figure 3 Change in capital expenditures by industry


Note: Bars show the change in aggregate capital expenditures for each industry. Results reported for the median firm within each industry are weighted by the firms’ asset size in 2019. 
Source: S&P Capital IQ; and author’s calculations.

2) Zombification

The efficiency and size of public support to firms in the Covid-19 crisis has also reignited fears of ‘zombification’. By being too generous, policy support might actually keep some unviable firms alive – the so-called ‘zombies’ keeping valuable resources away from viable ones. Preliminary evidence for France suggests that this phenomenon has not yet materialised, and that the normal pattern of firm failures was unchanged in 2020, despite widespread government support (Cros et al. 2021). The peculiar nature of the Covid 19 crisis also implies that many firms could temporarily be classified as zombies when they are in fact viable (Laeven et al. 2020). In our sample, the number of firms with an interest coverage ratio below one (a standard criteria in the literature) is still relatively low. Less than 2% of firms in the sample currently fall in this category (i.e. around 800 firms), and only 20% of those actually entered the pandemic as ‘zombies’ (i.e. with a ratio that was already below one in 2018 and 2019). This backward looking analysis, however, does not preclude a rise of zombies in the future, especially if consumer demand shifts permanently away from some goods and services but governments are reluctant to let some companies fail.

3) Level and quality of corporate credit

Rising lower-quality corporate credit in many economies was already a cause for concern before the pandemic. Although swift and strong policy support has allowed firms to borrow extensively, it has also amplified debt concerns. Around 30% of the non financial corporate debt stock currently rated by S&P sits in entities rated as ‘speculative’, and 40% in entities with only a ‘BBB’ rating (the lowest rating in the investment grade category). Mirroring the resilience observed in the broader sample of firms, the share of distressed firms in the sample of rated firms has also remained low and stable. In particular, the Covid-19 shock has had a limited impact on the sectors that have issued most of the risky debt at the global level, such as utilities and telecommunications (Figure 4). The consumer services sector – hit the hardest and reported the lowest median interest coverage ratio in FY 2020 among all industries – accounts for only a small portion of the lower quality debt stock. Still, solvency challenges remain in several industries, especially with much corporate debt due to mature in 2024, at a time when policy interest rates may be higher than when some of the debt was issued.

Figure 4 ‘Risky’ debt and the median interest coverage ratio by industry 


Note: Risky debt refers to the total amount of debt (both loans and bonds) in firms rated BBB or speculative, as of FY 2019. The median interest coverage ratio (ICR) reports the median FY 2020 ICR of firms with a BBB or speculative rating operating in each industry, using 2020 firms’ debt size as weights. This measure is preliminary since the 2020 ICR is still missing for 25% of the firms.  
Source: S&P Capital IQ; and author’s calculations.

Dealing with the pandemic’s legacy

Addressing those challenges will be difficult, but past experience offers some guidance. While supporting companies is still warranted to avoid unnecessary scarring, especially in high-contact sectors still affected by restrictions, the Japanese experience points to an increasingly targeted approach that facilitates the necessary reallocation of labour and capital across sectors and firms and limits the potential emergence of zombies (Hoshi 2020). The corporate debt overhang problem, which affected many advanced countries in the wake of the global crisis, also suggests the use of grants and equity-type financing (rather than debt) to avoid weighing on firms’ investment and, ultimately, on the recovery (Kalemli-Özcan et al. 2019). Possible approaches could include converting some pandemic-related public loans into grants, with repayment conditional on performance and regular assessments of viability, or strengthening incentives for private sector equity financing and co-participation in public support schemes. Recent research also shows that timely debt restructuring and efficient insolvency regimes will be key in determining the ultimate costs of the Covid-19 corporate debt boom (Adalet McGowan et al. 2017, Jorda et al. 2020). 


Adalet McGowan, M, D Andrews and V Millot (2017), "Insolvency regimes, zombie firms and capital reallocation", OECD Economics Department Working Papers 1399, Paris: OECD Publishing.

Cros, M, A Epaulard and P Martin (2021), “Will Schumpeter Catch Covid-19?”, CEPR Discussion Paper 15834.

Demmou, L, S Calligaris, G Franco, D Dlugosch, M Adalet McGowan and S Sakha (2021), "Insolvency and Debt Overhang Following the COVID-19 Outbreak: Assessment of Risks and Policy Responses", OECD Economics Department Working Papers 1651, Paris: OECD Publishing.

Djankov, S and E Zhang (2021), “As Covid rages, bankruptcy cases fall”, VoxEU.org, 04 February.

Jorda, O, M Kornejew, M Schularik and A Taylor (2020), “Zombies at Large? Corporate Debt Overhang and the Macroeconomy”, NBER Working Paper 28197.

Hoshi, T (2020), “Zombie banking, zombie borrowing: Japanese lessons for the COVID-19 era”, Peterson Institute for International Economics.

Kalemli-Özcan, S, L A Laeven and D Moreno (2019), “Debt Overhang, Rollover Risk, and Corporate Investment: Evidence from the European Crisis”, ECB Working Paper 2241.

Laeven, L, G Schepens and I Schnabel (2020), “Zombification in Europe in Times of Pandemic”, VoxEU.org, 11 October. 

OECD (2021), OECD Economic Outlook, June, Paris: OECD Publishing.


1 The analysis is based on firm-level data provided by S&P Capital IQ. The sample covers 55 000 public and private non-financial companies operating in OECD countries and major (non‑OECD) emerging-market economies, and for which FY 2020 accounts are now available. The firms covered are relatively large and collectively represent USD 25 trillion of corporate debt. The median firm in the sample had USD 30 million in revenues in 2019 and USD 35 million in assets. Ten per cent of firms are located in emerging‑market economies.

2 In FY 2020, 5% of firms reported negative equity, and less than 2% an ICR below one. These numbers are almost unchanged compared to FY 2019.  

3 The negative relationship between leverage and capital expenditures is in line with Demmou et al. (2021).

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