Risk Management for Corporate External Finance: Research Paper

Summary

Corporate external finance comes from different sources. This document looks at the risks linked to each source, how to manage these risks and some best practices from around the world.

Different ways to get finance

Private capital flows to developing countries have changed over time. Bonds, foreign direct investment and portfolio investment are now more important than bank lending. Some new financial instruments combine features of bonds and bank lending.

Types of risk and management

Risks come in many forms, such as market risks, country-specific risks, and operational risks. Stress tests can help assess these risks. Strategies to manage them include monitoring debt, maintaining cash balances, and smoothing debt maturities.

Debt sustainability and distress

Debt sustainability indicators help assess a country's ability to manage its debt. Debt distress can happen due to exceptional finance needs, such as arrears or rescheduling. Standard models and stress tests help in assessing risk and sustainability.

Key terms

Syndicated bank lending

A loan offered by a group of lenders who work together.

Eurobonds

Bonds issued and traded internationally, not subject to national regulations.

Convertibility risk

Risk that a domestic currency cannot be easily converted to a foreign currency.

Stress tests

Tests that simulate extreme conditions to assess risk and sustainability.

Debt sustainability indicators

Tools to assess a country's ability to manage its debt over time.

Non-performing assets

Assets that are not generating income or have defaulted on payments.

Questions this document helps with

• What are the main sources of corporate external finance?
• How do stress tests help in managing corporate risks?
• What indicators show that a country is in debt distress?

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