Measuring refinancing risk: a methodological approach for financial statement analysis

Abstract

Refinancing obligations is a common practice among firms when long-term maturity has shortened markedly. Without the application of Asset and Liability management (ALM), firms are often forced to refinance in unfavorable market conditions, for example, facing higher interest rates. Although, ALM has been widely studied and applied for firms in the financial sector, in the non-financial sector its application has been scarce.

This article sets a methodology for risk management analysis, to be applied in the non-financial sector, which quantifies how exposed a firm could be, by only using publicly available information contained in Financial Statements.

In particular, we propose two measures: (1) the structural mismatch of the Balance Sheet, which measures how likely a firm is to refinance its obligations, and (2) the Equity at Risk (PaR due to its’ Spanish abbreviation), which captures the greatest expected loss that comes from refinancing in adverse market conditions. The referred metrics are validated accordingly thorough statistical tools.

To do this, we use a sample of 163 Chilean public firms and show that our measures explain more the likelihood of refinancing by a firm compared to an alternative proxy commonly used in the literature.