Credit Manager Magazine 9/2021

54 CREDIT MANAGER MAGAZINE WRZESIEŃ / SEPTEMBER 2021 European smes: 7-15% at risk of insolvency in the next four years In 2020, state support softened the blow of the Covid-19 shock, reducing the number of fragile SMEs by more than 8,000 in Germany, France and the UK. Yet, we find that 7%, 13% and 15% of SMEs in the three countries are still at risk of insolvency in the next four years. Euler Hermes Our past research 1 has identified three lead- ing indicators that can help detect corporate distress four years before a bankruptcy: prof- itability, capitalization and interest coverage. Applying these criteria to close to 525,000 SMEs, we find that 7% of total SMEs are at risk in Germany, 13% in France and 15% in the UK. This compares with 9%, 14% and 17%, respectively, in 2019, which means that state support not only cushioned the blow of Covid-19 but overcompensated for it, with direct subsidies (including partial unemploy- ment schemes) and tax deferrals fully cover- ing non-financial corporates’ losses in value added from 2020. Without state support, the share of frag- ile SMEs would have been much higher in France and the UK, at 17% and 26% respec- tively (see Figure 1), as margins would have Figure 1 – Share of fragile SMEs in 2020 Sources: Euler Hermes, Allianz Research lost more than -5pp. Interestingly, in Germa- ny, the share would have remained relative- ly stable despite a shock of close to -3pp for margins from peak to trough. This is because fragile SMEs in Germany have worse finan- cial indicators (profitability, capitalization and interest coverage) compared to those in France and the UK. Hence, in the absence of state support, these fragile SMEs would have been more likely to transform into zombies and thus become insolvent faster. Which sectors are the ones to watch? Automotive, transport equipment, services, retail, construction and energy appear the most exposed. By looking at SMEs at the sector level, we see many discrepancies within countries and sectors in different countries. If we look at our three leading indicators in Germany for our entire sample, automotive suppliers, elec- tronics and machinery and equipment had weaker metrics in 2020 than in 2019 on all three indicators. Automotive suppliers saw two out of the three indicators worsen as well in France and the UK, whereas manufactur- ers proved to be more resilient (see Figure 2). The top three sectors which account for the highest share of fragile SMEs in Germany are automotive suppliers, transport equipment and services, with automotive manufacturers not very far (see Figure 3). Electronics and paper are also sectors where the share of frag- ile SMEs is higher than the country average. In France, automotive suppliers, transport equipment and energy are on top of the list, mainly due to deteriorating profitability and capitalization. However, agrifood and servic- es also account for a higher share of fragile SMEs compared to the country average. In the UK, it is mainly energy, automotive sup- pliers, construction and retail. As public support comes to an end, SME payment terms and Days Sales Outstanding will rise. Since mid-2020, we have frequently high- lighted the trend of corporate cash-hoard- ing. 2 In some countries, cash has increased more for large companies than SMEs (Ger- many), while for others the cash accumu- lation was higher for SMEs (the UK, Italy, Spain). For France, the distribution was rela- tively balanced between large companies and SMEs. We pursue this exercise on our pro- prietary database by measuring SMEs’ ability to pay short-term obligations (i.e. those to be paid within one year) as a proxy for cash positions. We find that the average current ratios have increased in all three countries BUSINESS