what impact on the indebtedness of SMEs?
SMEs exposed to the health crisis have withstood the activity shock relatively well
In order to measure the impact of the health crisis on SMEs, we analyze the situation of companies with a balance sheet as of June 30, 2020 (thus covering the first confinement) and for which a 2019 report is available. In total, we examined 179,607 balance sheets of SMEs with over 750,000 euros in turnover within the Banque de France FIBEN database. This sample does not contain information on the smallest SMEs but nevertheless represents 47% of the added value of SMEs in 2018. It allows an initial assessment of the impact of the health crisis on SMEs, based on the data. observed.
The turnover of these companies fell by 5.2% between 2019 and 2020, and added value by 5.9%. Staff costs were reduced (-4.9%) thanks to the partial unemployment scheme to which they have largely adhered. CoeurÃ© Committeeprogress report, more than 80% of companies that have received support of any kind have fewer than 250 employees. The decrease in gross operating surplus (GOS) was therefore limited to 8.1%.
Overall, SMEs have held up fairly well. However, not all sectors were affected in the same way: the drop in turnover was very marked in accommodation and food services (-32.2%) and, to a lesser extent, in services businesses (-8.7%) and industry (-6.9%); it is more limited in the retail trade (-2.1%). In addition, these sectoral disparities mask very heterogeneous situations within the same sector. Bureau et al., 2021).
Operating cash flow remained stable, cash flow and debt increased
Faced with this business shock, SMEs have mastered their operating flows, measured against turnover. In fact, in 2020, companies’ GOS stood at 6.9% of turnover, a level similar to that of 2019 (see graph 1). They have also reduced their Operating Working Capital Requirements (ROB). Investments and dividends have also been adjusted downward to stay in line with revenue as in 2019 and they have consolidated their capital base. Nevertheless, we note that the cash flow of the SMEs analyzed here has been consolidated well beyond what would have been possible with such operating cash flows, since it increased by 37.5% between 2019 and 2020. .
In fact, 2020 was marked by a sharp increase in the gross financial indebtedness of these SMEs: up 15.9% in 2020 after 2.1% in 2019. Before they knew the extent of the trade shock they would have to face, and before the full deployment of the support measures, SMEs make extensive use of State Guaranteed Loans (SGL) from April 2020 (Vinas 2020). In our sample, 39% of companies took out an SGL and for these companies, the amounts of SGL granted represented 44% of their total financial debt at the end of 2020.
Net debt: a generally favorable situation but some more difficult individual situations
Should we be worried about this increase in debt? According to the latest macroeconomic statistics from the Banque de France, for all non-financial corporations (SNF), i.e. including SMEs, mid-cap companies and LEs, the gross debt outstanding increased by more than 200 billion euros over one year at the end of December 2020, but the net debt n ‘increased by only 5 billion euros, this difference being mainly due to changes in the cash position.
For our sample of SMEs, at the aggregate level, we observe that the gross debt to equity ratio fell from 66.9% in 2019 to 74.4% in 2020. On the other hand, the net debt to funds ratio own assets fell by more than 4 percentage points, from 30.1% to 25.9%. The companies in our sample therefore seem to have kept a large part of their financing flows in cash in 2020, like all NFCs.
But what about at the individual level? In 2020, gross debt increased for more than half (54%) of the companies in our sample. Among this half, more than 8 out of 10 companies (or nearly 45% of all companies) reported an increase in their cash flow. The vast majority of companies that got into debt during the crisis therefore kept at least some of these funds in cash. For those whose indebtedness has increased but not their cash flow, which represents 10% of all SMEs (= 0.54 x (1-0.82)), potential difficulties are to be expected.
This increase in leverage worsened the gross leverage ratio of companies in our sample: all quartiles of the gross leverage ratio distribution increased between 2019 and 2020. For example, 25% of companies had a debt ratio. gross on equity greater than 123.8% in 2020 (see table 1). Conversely, all quartiles of the net cash leverage ratio distribution improve in 2020. For example, only 25% of companies have a net leverage ratio above 55.4%. And 50% of the SMEs in the sample had a negative net leverage ratio (less than -2.9%), which means that 50% of the SMEs had enough liquidity to cover the repayment of their gross debt.
Table 1: Evolution of the distribution of gross and net leverage ratios between 2019 and 2020
Note: In 2019, 25% of companies had a net debt ratio of less than -40.2% (i.e. they had more cash than gross debt), 50% of companies had a net debt ratio of less than 0% and 75% had a net debt to equity ratio of less than 58%.
To what extent can the operating cycle help repay the financial debt incurred during the crisis?
The difference between a net debt and gross debt approach is whether or not companies use their cash to pay down debt. If the latter, to what extent would a company’s operating cycle allow it to repay its debt?
To answer this question, we analyze the evolution of the ratio of stable financial debts to the company’s self-financing capacity. This ratio measures the number of years it would take to repay stable financial debts if all internal cash flows were allocated to them. Deferred taxes and social charges are excluded here because of the difficulty of isolating them in the balance sheets of companies. However, thanks to the exceptional reimbursement mechanism, it was possible to spread them over several years.
The debt ratio at more than one year to the company’s cash flow deteriorated in 2020, dropping from 361% in 2019 (i.e. 3.6 years of cash flow) to 459% (i.e. 4.6 years of cash flow). It would therefore take about “one more year of business” to repay the company’s long-term debt. The deterioration of this ratio is due to the increase in gross indebtedness and the decline in activity. A less conservative and more plausible calculation assumption would be to assume a return to the activity level of 2019, approximated by the cash flow of 2019. Indeed, according to the Banque de France macroeconomic projections for June 2021, activity should start to exceed its pre-Covid level as early as the first quarter of 2022. This ratio between long-term debt at the end of 2020 and the company’s 2019 cash flow has also deteriorated, but in a lesser extent, at 429%. With this correction, which assumes a return to the pre-crisis level of activity, it would therefore be necessary – with unchanged cash flow – a little more than 8 months of âadditionalâ activity (0.7 years) to repay the additional gross debt. contracted in 2020. This is an upper limit since the majority of companies could also use their cash surpluses to reduce their debt.
When examining the situation of SMEs at the individual level, this deterioration can be put into perspective. While for 25% of companies this ratio has deteriorated by more than two years of cash flow, the median increase in the ratio in 2020 of stable debt to cash flow for 2020 is 3 percentage points. Thus, for the majority of the companies that we observe, this ratio has not deteriorated significantly.
Overall, therefore, the support measures and expenditure adjustments made by SMEs have enabled them to weather the health crisis reasonably. However, some businesses will require close monitoring during the recovery period (Doucinet et al., 2021). This is the objective of the national support system for companies emerging from the crisis, of which the Banque de France is a signatory.