important role to facilitate firm restructuring<sup>2</sup> ; reduce liquidations of cash-strapped, but otherwise viable businesses; and “flatten” the bankruptcy curve. Taken together, such measures can also mitigate the shock of widespread default in the corporate sector on banks’ balance sheets, which could impede them from supporting the economic recovery.

# 2. Market Conditions: NFC’s Market Access and Credit Ratings

**Emerging market (EM) credit markets were heavily affected by the COVID-19-induced financial market volatility in March 2020, although sentiment has improved recently,** driven by a recovery in US credit markets induced by central bank and other policy measures (also see Gurhy et al (2020)). Median emerging market corporate primary market external issuances (bonds and loans) for the first 5 months of 2020 were 0.3 percent of GDP, compared with 0.9 percent for the same period in 2019. This was primarily driven by a retrenchment in the syndicated loan market, due to both the structural nature of this market segment, a reduction in bank risk taking, as well as the fact that many corporate entities reverted to usage of bank revolving credit lines. While March saw a minimal level of external debt issuance, issuance picked up again in April and May, particularly for investment grade issuers in the bond market. Despite this, many NFC issuers remain particularly exposed to sudden shifts in investor risk sentiment, and associated EM currency depreciation. The increased issuances by some NFCs during April and May 2020 can be viewed as a balance sheet reinforcing exercise. In addition, several companies already pre-financed their upcoming maturities during the record gross issuance year of 2019 and first two months of 2020, which helps to moderate near-term refinancing concerns.

**EM corporate credit ratings have come under renewed pressure**<sup>**3**</sup> **as the fallout from the pandemic affects both corporate and sovereign fundamentals,** leading to a material worsening in the credit metrics of most issuers (Exhibit 1). The numerous sovereign rating downgrades in recent months also have direct implications for corporate issuers.<sup>4</sup> Sovereign driven rating actions have negative implications on credit spreads through the relative value comparisons to lower rated credits, while wider sovereign spreads will also affect corporate funding costs. In addition, a sovereign downgrade implies a more challenging macro environment which eventually has negative repercussions on the standalone fundamentals of the corporates.

> 2 See World Bank and INSOL International COVID-19 Global Guide on Emergency Measures to Support Distressed Businesses, available at: http://pubdocs.worldbank.org/en/194131592248086470/global-guide.pdf.

> 3 The number of rating downgrades so far in 2020 is at circa 250 against just 20 upgrades, with a sizable magnitude of negative watches and outlooks portending further cuts for the foreseeable future. Sovereign driven rating actions accounted for about onethird of the YTD downgrades.

> 4 The regional rating trends for EM corporates show the biggest deterioration in Latin America where there have been 110 downgrades year to date, with half driven by negative sovereign rating downgrades. This is also the case in the Middle East & Africa where only 18 of 41 downgrades are not government driven. By contrast, most of Asia’s 76 downgrades are due to standalone fundamentals without sovereign pressure.

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