Default risk transmission in the travel and leisure industry

Default risk in the Travel and Leisure (T&L) industry remains understudied despite its implications for the industry's health and stability. This paper investigates the transmission of default risk among US T&L firms over various credit horizons from July 22, 2008 to December 9, 2022, paying special attention to the impact of COVID-19. The short-, medium-, and long-term default risk factors are extracted from the Credit Default Spread (CDS) curve of the US T&L industry then used within a connectedness approach. The results reveal considerable default risk transmission, particularly in the long-term. Default risk transmission has spiked across all horizons since the pandemic, reflecting the deterioration in credit quality of T&L firms under the pandemic. Analysis of the drivers of default risk transmission shows that several macro-financial variables, especially news market sentiment and stock market volatility induced by the pandemic, have an important explanatory role.

Pricing the Pandemic: Evidence from the Bond Market in China

This study investigates whether and how the pandemic is priced in the bond market in China. Using the city-level COVID-19 cases on a daily basis, we find a significant positive relationship between the pandemic outbreak and corporate credit spreads, implying that investor risk perception on pandemic exposure attracts a premium. Consistent with the default risk channel, corporate financial resilience alleviates pandemic pricing. Information asymmetry and tail risk can amplify the pricing effect because of reduced investor risk-bearing capacity. These findings are robust in addressing endogeneity concerns. We contribute to the emerging literature on the pandemic effect on credit markets. © 2023 Taylor & Francis Group, LLC.

Is credit default swap spread a leading indicator of bank default risk? Evidence of Indian banks during the COVID-19 pandemic

The paper investigates whether credit default swaps (CDSs) spread of Indian banks is a leading indicator for bank default risk. The paper uses Merton-type models to estimate theoretical CDS spread of the sample of Indian banks and then compares it to their balance sheet ratios. Though theoretically, higher CDS spreads indicate higher default risk, the paper finds that in times of shocks, like the present COVID-19 crisis, it becomes difficult to isolate the spread movements due to true default risk versus those based on panic and speculation. The paper then correlates equity premiums and CDS premiums and finds negative correlation. The equity market returns lead the CDS market returns in capturing default risk. As default risk is priced better in equity markets, it is preferable for institutional investors to trade default risk of Indian banks in the stock markets rather than the CDS markets.

Firms' rollover risk, capital structure and unequal exposure to aggregate shocks

We examine how debt rollover risk affects firms' capital structure following aggregate profitability shocks. Exploiting plausibly exogenous variation in perceived exposure to the Covid-19 pandemic, we find firms that are highly exposed to both rollover risk and aggregate shocks significantly raise leverage, compared to less exposed firms. The effect is amplified when regulators provide liquidity support to debt markets. Higher exposure to both risks, and consequent increase in leverage, leads to substantially diminished distance to default. We show the increase in leverage is consistent with standard trade-off theory, suggesting equity-holders tolerate a lower distance to default as long as cash flows received in continuation exceed that received in bankruptcy. Overall, our findings highlight how financial constraints can meaningfully affect firm policies following negative economic shocks.

The power of technology: FinTech and corporate debt default risk in China

With the economic downward pressure increasing and the COVID-19 spreading, avoiding the corporate debt default risk is a basic requirement for achieving high-quality economic development in China. Can FinTech empower traditional finance and contribute to the healthy development? We explore the impact of FinTech on corporate debt default risk. The findings suggest that FinTech reduces the corporate debt default risk. And the impact is more pronounced in non-SOEs and in firms with small-scale and in the growth and maturity stages. Further analysis shows that financial supervision plays a role in strengthening the negative impact of FinTech on the corporate debt default risk. Therefore, FinTech development should be actively promoted and corresponding regulatory measures should be formulated, then the finance can better serve the real economy and achieve high-quality development in China. © 2023 Elsevier B.V.

Modern pandemic crises and default risk: Worldwide evidence

This article examines the relationship between modern health pandemic crises and financial stability. Specifically, it collects data on 250,223 firms in 43 countries (or regions) during five modern pandemic crises, SARS (2003), H1N1 (2009), MERS (2012), Ebola (2014), and Zika (2016), and finds that pandemic crises significantly increase the default risk of enterprises. Further analysis shows that formal and informal institutions acted as a "cushion” against the pandemic crisis. The earlier a country adopts IFRS, the more unimpeded access to information, and the more stable religious and ethnic relations within the country can reduce the negative impact of a pandemic on financial stability. This article addresses the hitherto inadequacy of COVID-related data. In addition, this article argues that governments should build sound state institutions to withstand macroeconomic shocks and highlights the heterogeneity of default risk for enterprises operating in countries with different institutions. © 2023 John Wiley & Sons Ltd.

How can banks and finance companies incorporate value chain factors in their risk management strategy? The case of agro-food firms

A value chain framework for guiding the financial firms in their credit decisions is urgent, as the current COVID-19 pandemic has highlighted, but missing in the extant literature, particularly for those that lend to industries sensitive to value and supply chain bottlenecks. This study creates knowledge in value chain finance, a big untapped and un-researched market. It constructs, confirms, and validates a value chain framework for assessing risks in lending to Agro and Food Processing firms in which value chain risks are major business concerns globally. To pursue the objectives of the study, we use a novel methodology that integrates the Modified Delphi technique, exploratory factor analysis, confirmatory factor analysis, and discriminant analysis. Based on testing and analysis of primary data, including loan data, a framework comprising six factors is proposed for use in conjunction with existing risk assessment models of finance companies to improve the quality of their credit decisions, contributing to their performance sustainability. © 2022 ERP Environment and John Wiley & Sons Ltd.

Breakup and default risks in the great lockdown

In this paper, we exploit CDS quotes for contracts denominated in different currencies and with different default clauses to estimate the risk of a breakup of the Eurozone and the propagation of breakup and default risks after the COVID-19 shock. Our main result is that the risk of a Eurozone breakup is significant although, quantitatively, it is not larger than in the period before the COVID-19 shock. In addition, we find that an increase in the redenomination risk in one country is associated with an increase in default premia and bond spreads in other Eurozone countries. Finally, we find that a sizeable fraction of the changes in the cost of insuring against redenomination and default reflects two additional factors: the first captures the insurance cost against a euro depreciation conditional on redenomination, while the second captures liquidity premia. © 2021 Elsevier B.V.

Leadership in a pandemic: Do more able managers keep firms out of trouble?

The Coronavirus crisis has led to unprecedented economic shocks to the corporate world and challenged how corporate management contributes to business resilience amid the pandemic. Employing a novel measure of managerial ability constructed for a large sample of U.S. publicly listed firms, we document that firms led by higher managerial ability exhibit lower stock return volatility, higher operating performance, and lower levels of default risk amid the pandemic. A difference-in-differences analysis suggests that the impact of managerial ability on firm performance is stronger during the pandemic than during the pre-pandemic period. The effect of managerial competency on corporate resiliency is more pronounced among firms that have high exposure to COVID-19. In addition, firms led by high managerial competency management are associated with higher stock liquidity and are less likely to exhibit employment, healthcare, safety, and consumer protection related violations amid the pandemic.

Can the modified ESG-KMV logit model explain the default risk of internet finance companies?

With the rapid development of internet finance in China, the risk management of internet finance has become an urgent issue. This study analyzes the factors that affect the default risk of Chinese internet finance companies based on measuring the distance to default of companies. This study incorporates ESG rating into the evaluation model to comprehensively reflect the default risk factors. The traditional KMV model is modified with ESG rating, and results are used to construct the panel logit model. Based on internet finance firms listed on China A-Shares data from 2016 to 2020, our results show the following: first, the modified ESG-KMV logit model can effectively analyze the influencing factors of the internet finance default risk. Second, ROE, accounts receivable turnover ratio, asset-liability ratio and z-value are important factors that affect the default risk of internet finance companies. Third, it is also found that COVID-19 has significantly impacted the default risk of internet finance companies. As a policy implication, the regulator can incorporate ESG into the measurement of the default risk to create more awareness among internet finance companies on the importance of the environment and sustainability to human societies. Copyright © 2022 Zeng, Lau and Abdul Bahri.

Network Topology of Dynamic Credit Default Swap Curves of Energy Firms and the Role of Oil Shocks

Using network analysis on the connectedness of default factors in a credit default swap (CDS) dataset of U.S. and European energy firms, we provide the first evidence of differences in the shape and dynamics of the interconnectedness of the level, slope, and curvature, representing long-, short-and middle-term default factors, respectively. The interconnectedness of the three default factors increases during the European sovereign debt crisis (ESDC), whereas only the interconnect-edness of the level factor increases during the oil price crash, and the interconnect-edness of both level and slope factors spikes during COVID19. European firms contribute more to the transmission of long-term and short-term default risk from early 2011 till the beginning of the 2014–2105 oil price crash;afterwards, U.S. firms are major default transmitters despite some periods of parity with European firms. The impacts of oil demand and supply shocks on the various interconnect-edness are quantile-dependent and more pronounced in the long term for the credit risk of the energy firms. © 2022 by the IAEE. All rights reserved.

Green Banking-Can Financial Institutions support green recovery?

The outbreak of the Covid-19 pandemic has impeded the transition to sustainability and net-zero targets. The immediate focus on health-related issues limits the progress of the pro-ecological initiatives. Financial institutions can play a pivotal role in supporting green recovery, notably in emerging markets. This paper evaluates the incentives of sustainable financing for banking firms in member states of the Gulf Cooperation Council. Using a comprehensive sample of banks between 2011 and 2021, we report that increasing green exposure will improve the intermediation spread. Similarly, when banks have environmental considerations for extending loans, their risk of default will reduce. The impact of green financing is more profound for smaller banks indicating that responsible lending provides them with new earning avenues while mitigating the risk. The findings are reassurance for green recovery, and because of the explicit benefits, banks can play a critical role in helping in achieving sustainable development goals. The results have important implications for regulators, monetary authorities, and the banking sector since green financing can lead to more efficient and resilient financial systems.

How can banks and finance companies incorporate value chain factors in their risk management strategy? The case of agro‐food firms

A value chain framework for guiding the financial firms in their credit decisions is urgent, as the current COVID-19 pandemic has highlighted, but missing in the extant literature, particularly for those that lend to industries sensitive to value and supply chain bottlenecks. This study creates knowledge in value chain finance, a big untapped and un-researched market. It constructs, confirms, and validates a value chain framework for assessing risks in lending to Agro and Food Processing firms in which value chain risks are major business concerns globally. To pursue the objectives of the study, we use a novel methodology that integrates the Modified Delphi technique, exploratory factor analysis, confirmatory factor analysis, and discriminant analysis. Based on testing and analysis of primary data, including loan data, a framework comprising six factors is proposed for use in conjunction with existing risk assessment models of finance companies to improve the quality of their credit decisions, contributing to their performance sustainability.

Credit default risk in Islamic and conventional banks: Evidence from a GARCH option pricing model

An important question in banking is whether restrictions placed on Islamic banks make them more resilient to financial market turmoil and less prone to failure than conventional banks. We evaluate this claim by estimating credit default risk measures for a sample of conventional and Islamic banks using a GARCH option pricing model. Using a daily data set that is better suited for the time variation in volatility, we calculate distance to default measures to evaluate credit risk of Conventional Banks (CBs) and Islamic banks (IBs). We find higher default risk measures for IBs than CBs in general except during the Global Financial Crisis. This result holds true after controlling for bank and country specific variables in that IBs seem to have significantly lower default risk during the Global Financial Crisis and higher default risk thereafter. Consequently, while restrictions on risk taking is advantageous in financial turmoil episodes, the same restrictions expose IBs to risks in normal times. Finally, the credit risk of CBs and IBs is negatively affected by the oil crisis in 2014–2015 and the Covid-19 global pandemic. While there is no significant difference between the effects of the oil crisis on IBs versus CBs, the recent Covid-19 pandemic seems to have worsened the credit risk of IBs compared to CBs.

Environmental, Social, and Governance Impact on Energy Sector Default Risk—Long-Term Issuer Credit Ratings Perspective

The aim this study is to analyze the impact of environmental, social, and governance (ESG) measures on energy sector credit ratings. The main hypothesis is as follows: The ESG measures have had a significant impact on energy sector credit ratings during the COVID-19 crisis. The analysis has been conducted by using long-term issuer credit ratings presented by the main credit rating agencies. To verify the hypothesis, quarterly data from financial statements, macroeconomic data, and ESG measures for all companies listed on the stock exchanges from all over the world for the 2000–2021 period were collected. The sector was divided into sub-samples according to the type of sector and the moment of the COVID-19 crisis. It was noticed that a stronger reaction of credit ratings during the COVID-19 crisis on ESG factors, than that before it, was also observed, and confirms the increasing role of ESG measures in the financial market. On the other hand, credit rating agencies take into consideration ESG factors during the first estimation. Later, the mentioned variables lose their importance. This is based on a few reasons. It is still a small sample of entities that publish non-financial statements connected with ESG. Some countries have yet to implement regulations associated with climate risk. The significance of electricity power consumption and CO2 emissions confirms the significance of the mentioned direct or indirect impact of ESG factors. Credit rating agencies are not willing to change credit ratings because usually companies from the energy sector, especially from coal and oil and gas subsectors, are large entities. They sometimes receive financial support from governments. Governments are also stakeholders that create a lower risk of default. In less developed countries, coal is one of the main energy sources, and costs connected with alternative, renewable energy are more expensive. The prepared research also suggests that particular ESG measures have varying significance on credit ratings. Therefore, it can help to analyze and build models by investors. It will not be without significance for estimating the default risk and the cost of the capital. In most cases, the most significant measure is the E factor. Copyright © 2022 Chodnicka-Jaworska.

Optimizing the Financial Efficiency of Logistics Companies with Data Envelopment Analysis Model

The Covid-19 Recession, which also refers to the Great Lockdown, has caused the fall of many industries in 2020. Even though this recession has somehow encouraged the booming of online business, logistics organizations still suffer from various business risks including route closure, default risk, high parcel volume, risk of the highly contagious Covid-19 virus and technological risk. The logistics industry is very prominent in moving the national economy of a country and is also the key to transport necessities and medical supplies during the Great Lockdown. Therefore, to assist logistics players in identifying their strengths and shortcomings while improving their weaknesses, this research aims to propose a research framework to optimize and compare the financial performance of listed logistics companies in Malaysia with Data Envelopment Analysis (DEA) model. This research found that 41.18% of logistics companies are efficient, namely COMPLET, GDEX, LITRAK. MISC, MMCCORP, SURIA and XINHWA. This research has also successfully found the benchmarks for inefficient logistics companies for their financial and operational enhancements. Future studies can apply this research framework with DEA model on other industries. © 2022, The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd.

A Mellin Transform Approach to the Pricing of Options with Default Risk.

The stochastic elasticity of variance model introduced by Kim et al. (Appl Stoch Models Bus Ind 30(6):753-765, 2014) is a useful model for forecasting extraordinary volatility behavior which would take place in a financial crisis and high volatility of a market could be linked to default risk of option contracts. So, it is natural to study the pricing of options with default risk under the stochastic elasticity of variance. Based on a framework with two separate scales that could minimize the number of necessary parameters for calibration but reflect the essential characteristics of the underlying asset and the firm value of the option writer, we obtain a closed form approximation formula for the option price via double Mellin transform with singular perturbation. Our formula is explicitly expressed as the Black-Scholes formula plus correction terms. The correction terms are given by the simple derivatives of the Black-Scholes solution so that the model calibration can be done very fast and effectively.

COVID-19 pandemic risk and probability of loan default: evidence from marketplace lending market.

As the COVID-19 pandemic adversely affects the financial markets, a better understanding of the lending dynamics of a successful marketplace is necessary under the conditions of financial distress. Using the loan book database of Mintos (Latvia) and employing logit regression method, we provide evidence of the pandemic-induced exposure to default risk in the marketplace lending market. Our analysis indicates that the probability of default increases from 0.056 in the pre-pandemic period to 0.079 in the post-pandemic period. COVID-19 pandemic has a significant impact on default risk during May and June of 2020. We also find that the magnitude of the impact of COVID-19 risk is higher for borrowers with lower credit ratings and in countries with low levels of FinTech adoption. Our main findings are robust to sample selection bias allowing for a better understanding of and quantifying risks related to FinTech loans during the pandemic and periods of overall economic distress.

Environmental stocks, CEO health risk and COVID-19.

During the COVID-19 pandemic, we find that Australian firms with environmentally sustainable practices generated higher abnormal returns. Firms with CEOs who were exposed to significant health risks from COVID-19 experienced poorer stock market performance. Firms with low pre-COVID default risk and high pre-COVID liquidity performed better during the COVID-19 stock market crash. This research signifies the importance of environmental sustainability for Australian firms to endure pandemics such as COVID-19.