How do rating systems react to the crisis?

The current tendency is for the chances of success of companies to deteriorate, unless they have already been badly affected by the lockdown. This is heavily dependent on two factors: the industry in question and the respective area of business activity.

In businesses selling to consumers it is hardly possible to recover lost sales. The hotel and restaurant trade, the tourism industry and clothing retailers, for example, fall into this category.

The B2B area is also severely affected, even though this is not yet visible due to government support measures such as short-time working allowance.

We are experiencing that in sectors such as mechanical engineering, the automotive industry and equipment suppliers, investments are currently being postponed.

Problems are especially prevalent for companies with a high percentage of export activity. In Europe, countries such as Italy, Spain and Great Britain are economically troubled. Worldwide, there is a massive turnover crisis: the USA and the whole of South America are badly affected. Even in China, previous levels are nowhere near being achieved again and India is still right at the beginning. It will take a long time before everything recovers.

There are some industries, however, that have not yet been affected at all. The building industry, for example, is lagging the rest of the economy as it is being propped up by sumptuously filled order books. Here, a fall in turnover and a drought in new orders are expected for 2021.

Consequences for the ratings of companies

Companies that have taken on special loans (for example from the German KfW Bank) due to corona will have to pay the interest and repayment instalments. This will reduce profits.

Logically, this leads to reduced prospects for success, which in turn causes deterioration in ratings. Fundamentally, companies will have to live with the higher risk. For companies that were not particularly highly rated before the crisis one will be able to observe very poor ratings. This will lead to these companies only being supplied with payment in advance or the provision of securities – or not at.

How will credit insurance companies and credit institutes react?

What is the affect on credit insurance companies? Since the rating reflects the real risk situation for them as for any other business, the risk will increase on average. The tendency will be for limits to be cut or, for some countries, cancelled. For German companies the state guarantee in the amount of 30 billion euros will help to counteract this. We will see how long this lasts - especially since the guarantee is primarily for domestic companies.

What about credit institutes? According to Basel II/III they are supposed to have built up a risk capital buffer that can be used in situations like the one we are currently in. How the banks will actually react remains to be seen. This will be shown by their willingness to prolong expiring credit lines and grant new loans. But one should certainly expect increasing risk premiums and therefore higher interest rates.

What are the long-term effects of extended payment periods?

Are extended payment terms or temporarily postponing, for example, rent payments useful? In a lockdown this can help in the short term. But in the medium to long term the debtor simply piles up more liabilities, which become harder and harder to pay and make it questionable whether the debts can really be settled when business picks up.

Summary

In all probability the overall economic development will result in lower average ratings. This will also mean that there will be customers who can no longer be supplied on credit without securities.

There are also exceptions, of course: for example particular medical products and the suppliers of certain hygiene articles, and also bicycle manufacturers and retailers have experienced positive development. The latter, however, is partially the result of purchases brought forward, which could lead to a drop in turnover in later quarters.

Realistic risk evaluations are immensely important in securing one's own ability to continue doing business. Those who have implemented credit risk management with a high level of automation will have an advantage.

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