Modelling Italian Firms’ Financial Vulnerability

Abstract

We develop a model to assess the evolution of the Italian corporate sector’s financial vulnerability. We use micro data to take into account the heterogeneity of firms and their demography and we integrate them with macroeconomic forecasts in order to estimate EBITDA, interest expense and financial debt for each individual firm over a two-year horizon. In this way we obtain a projection of the share of vulnerable firms (those with negative EBITDA or whose interest expense-to-EBITDA ratio is above 50 per cent) and of their debt well in advance of the availability of actual data. By applying the model to the 2013 individual firm data (available only in early 2015), we estimate an increase in the share of vulnerable firms in 2014, followed by a sizeable decrease in 2015, mainly due to the reduction in interest rates and the economic recovery. The model is then used to evaluate stress scenarios for interest rates and profitability.

Keywords: firms’ vulnerability, debt, stress test

JEL Classification: D22, G32