Executive summary

• The war in Ukraine and new lockdowns in China have significantly deteriorated the balance of risks for companies. The shockwaves are visible in the extended supply-chain disruptions and transportation bottlenecks, as well as high input costs and shortages, notably for energy and commodities but also labor. To add to this, the global surge in inflation is accelerating monetary tightening, which will increase funding costs for companies.
• In the very short term, three signs of resilience should help prevent a massive surge in insolvencies. At the global level, the total cash holdings of listed firms was 30% higher at the start of 2022 than in 2019, and deposits of non-financial corporates (NFC) were 29% higher in the Eurozone and as much as 57% higher in the US. Our proprietary data also show that the number of fragile firms  has decreased, particularly in Italy (to 7% from 11%) and France (to 12% from 15%). In addition, the Q1 2022 earning season confirmed that listed companies have been far more capable of passing cost increases onto prices than expected.
• However, pockets of fragilities and uncertainty over how long the current shocks could last have already sparked the return of temporary support measures in some countries. First, working capital requirements increased in 2021 particularly in Asia (+2 days), Central and Eastern Europe (+2 days) and Latam (+2 days), and for sectors such as household equipment (+8 days), electronics (+3 days) and machinery equipment (+2 days). Second, non-financial companies in the Eurozone have posted a noticeable deterioration of their debt-to-GDP ratios (+5.2pp compared to +3.5pp for the US). In response, governments in France, Germany and Italy have already extended existing partial unemployment programs and introduced new forms of state-guaranteed loans, with more measures likely the longer this crisis lasts. We expect state support to be more targeted and limited this time around, but it could still delay the full normalization of business insolvencies once again, notably in some European countries.
• Overall, after two years of declines, we expect global business insolvencies to rebound by +10% in 2022 and +14% in 2023, approaching their pre-pandemic level.  While state support will keep insolvencies artificially low in France (32,510 cases) and Germany (14,600) in 2022, the UK could see a sharp rebound in 2022 (+37% y/y to 22,305 cases). One in three countries will return to pre-pandemic levels in 2022 and one in two countries in 2023. Africa and Central and Eastern Europe will both reach new record highs. In Asia, China should be able to maintain insolvencies in check but other countries could see an increase due to the deterioration of the regional and global environment. In contrast, companies in the US (15,500 cases in 2022) should benefit from the buffers accumulated since the pandemic, helped by the Paycheck Protection Program being massively transformed into subsidies and the recovery in profits.

Figure 1: Global and regional insolvency indices, yearly level, base 100 in 2019

In 2021, our Global Insolvency Index  posted its second consecutive annual decline (-12%), dropping to a record low as generous state support continued to shield companies from the after-effects of the Covid-19 pandemic. Out of the 44 countries in our index, 24 registered a decline for the full year, with massive decreases seen in the largest economies: the US (to -34% y/y in 2021 from -5% in 2020), Japan (-22% y/y), China (-28%), Germany (-12%) and France (-12%). As a result, most countries ended 2021 with business insolvencies below the levels recorded before Covid-19.

However, the “grand reopening” of economies did allow some governments to start cutting back on support measures, triggering the beginning of a normalization in business insolvencies in some countries . The return to normal conditions has been more difficult for companies that were already fragile before the pandemic, as well as those that have not been able to adapt their business models to the structural changes created or intensified by the pandemic (eg. new habits in mobility and working, online shopping etc.).

The normalization trend gained traction in the first quarter of 2022. While the latest available infra annual figures for 2022 (see Figure 3 and Table 4) continue to indicate disparities across and within regions, they also point to an upside trend reversal for a growing number of advanced economies and emerging markets. In Asia, China, Japan and South Korea still recorded less insolvencies in Q1 2022, but in Australia (+24% y/y in Q1), India (+26%) and Singapore (+30%) the rebound in insolvencies gained in intensity and posted a double-digit increase for the last 12 months (respectively to +21%, +55% and +39%). In Central and Eastern Europe, the upside trend was around +6% y/y in Q1 for the region as a whole due to the acceleration in Turkey (to +21% y/y in Q1) and Bulgaria (+24%), as well as the increase of cases in Russia (+6%) prior to the introduction of the moratorium starting from 01 April.

However, Western Europe stands out as the region with the largest rebound in insolvencies in Q1 (+26% y/y) despite differences between countries, including:
(i)    A prolonged low level of insolvencies in the Netherlands, Sweden, Portugal and Germany.
(ii)    A lull in Italy after the fast rebound recorded in 2021.
(iii)    Seven countries now posting an increase over the three months ( Norway, Ireland) or more importantly over the last 12 months: Austria (+52% as of Q1 2022), Belgium (+20%) and France (+8%);
(iv)    Three countries already facing, on a quarterly basis, more insolvencies than in 2019, namely the UK (+12% compared to Q1 2019), Spain (+39%) and Switzerland (+9%).

Figure 3: Global (left) and regional (right) insolvency index - quarterly change, y/y in %

However, the war in Ukraine and new lockdowns in China have significantly deteriorated the balance of risks for companies. Global headwinds emerging from both shocks are multiple , from supply-chain disruptions and transportation bottlenecks to shortages and high input costs, notably for energy and commodities. To add to this, companies also now face higher funding costs as an indirect consequence of the global surge in inflation, which has accelerating monetary tightening across the globe. These exceptional circumstances are adding extra challenges to the cyclical issues and structural changes in place.

In the very short term, three signs of resilience should help prevent a massive surge in insolvencies. First, firms have significant cash buffers to absorb the new shocks, providing they remain temporary. The cash holdings of listed non-financial corporates (NFCs) increased by +13% in 2021 compared to 2020, and +30% compared to 2019. At the same time, NFCs started 2022 with deposits 29% above 2019 levels in the Eurozone, 35% in the UK and 47% in the US.

Second, our proprietary data  show that the number of fragile companies decreased in 2021, particularly in Italy (to 7% from 11%) and France (to 12% from 15%) in comparison to Germany (to 6% from 7%) and the UK (to 17% from 18%).

Third, provisional reporting for the ongoing Q1 earning season has confirmed that listed companies have been far more capable of passing cost increases onto prices than expected. As of early May, our monitoring shows that 68% of companies beat expectations on sales and 62% on earnings per share. In addition, 77% of companies beat expectations for year-on-year sales growth and 60% did so with earnings per share growth. In most cases, companies providing guidance for FY2022 are keeping or improving their sales targets, while keeping earning per share growth targets unchanged.

Figure 6: NFC deposits in Western Europe and the US, end of quarter amounts in LCUbn

Looking closer at companies’ financial reveals that countries are unevenly exposed , with some sectors and types of firms more vulnerable than others. For one thing, despite a limited increase at the global level in 2021, working capital requirements (WCR) increased further in Asia (+2 days), Central and Eastern Europe (+2 days) and Latin America (+2 days), as well as in sectors such as household equipment (+8 days), electronics (+3 days) and machinery & equipment (+2 days). And the risks are on the upside for 2022 due to the rise in input costs and the need for precautionary inventories.

Table 8: Working Capital Requirements ( WCR), by global sector and region, in number of days in turnover

Detailed figures of cash holdings also reveal several discrepancies, with clear winners and losers. First, we see that Asian firms are hoarding 50% of the global amount, ahead of North America (24%).  In terms of sectors, consumer discretionary leads on cash-hoarding (18%), ahead of industrials (17%) and the tech sector (15%). Second, certain sectors have clearly demonstrated less favorable performance, including such as consumer staples in France, communications in the UK and the Netherlands. Finally, the overall dynamic rarely matches the pace of deposits’ for all NFCs, which indirectly suggests that large firms benefited more than SMEs in 2021 in the Netherlands, the UK, Germany and Spain.

Looking at cash burning, we again find an uneven dynamic among European countries, with more periods of cash depletion than cash accumulation, and with average cash depletion gaining in intensity over the last two quarters – notably in Germany, Italy, Spain and the Netherlands in Q4 2021, and France in Q1 2022.

To a certain extent, the prolonged low level of major insolvencies , with 68 cases in Q1 2022 and 260 over the last four quarters, is another sign of the greater resilience of large companies. But the large drop observed in the US (-113 cases for the last four quarters compared to the previous four quarters) and in Western Europe (-28 cases) should not overshadow the largely stable number of cases in Asia and China, with the most cases seen in the construction sector.

Table 9: Change in cash-holding by sector and country

Another risk factor is the elevated indebtedness that has resulted from the Covid-19 crisis, which could result in debt sustainability issues as interest rates increase. Japan and the Eurozone posted the strongest deterioration of NFC debt-to-GDP ratios (+13.5pp and +5.2pp, respectively) than the US (+3.5pp), though we notice a wide range within the Eurozone (from +4.2pp in Germany to +8.8pp in France). Our proprietary data also confirm the deterioration of the leverage ratio in Italy and Germany (+0.4pp to 7.9% and +0.9pp to 3.9%, respectively). In a recent study using panel data , we found companies will find it increasingly challenging to absorb losses in terms of margins amid high cost inflation and slowing demand, which could lower corporate pricing power in the coming quarters. We calculate that an increase of 100bp in key interest rates would translate into a -2.3pp fall in NFC margins in France compared to -1pp in Germany, -1.5pp in the UK and -1.4pp in the US.

Figure 12: Non-Financial Corporations (NFC) debt ratio, in % of GDP, selected countries

The global shocks induced by the war in Ukraine and the renewed lockdowns in China could kick start an extended round of support measures, which would delay the normalization in insolvencies. The probability is higher in Europe due to larger public finance capabilities, notably since the European Commission officially adopted a new Temporary Crisis Framework (TCF) on 23 March 2022, completing the extension of various measures of the Temporary Framework decided end of 2021 . The TCF will be in place until December 2022 and allows member states to ensure liquidity and access to finance for undertakings in a coordinated economic way while still complying with EU state aid rules.

France and Germany already kicked off the first support packages in March, and Italy followed in May. These packages are a mix of extensions of existing forms of support, such as the partial unemployment scheme and the temporary assistance program in Germany, and the launch of new state-guaranteed loans, such as the ‘PGE Resilience’ in France. If we take the example of France, the new package could reduce the expected rise in insolvencies to +15% from +30% in 2022. For Germany, it could reduce the increase to +4% from +7%.

At this stage, we expect the uneven initial conditions (in terms of corporate financials and exposure to the current headwinds) and the uneven (fiscal) room for maneuver to result in smaller and more targeted support packages. It is worth mentioning the specific case of Russia since, starting from 1 April, at the request of creditors, the Russian government introduced a moratorium on initiating bankruptcy cases that will last for six months and cover a wider scope of industries. In comparison, the 2020 moratorium targeted companies that were suffering the most from pandemic, as well as strategic enterprises. This new context is already accentuating the asymmetric return of insolvencies, hitting emerging markets at SMEs hardest.

Figure 14: Latest support measures to companies by country (to be) approved by EC

Overall, after two years of declines, we expect global business insolvencies to rebound by +10% in 2022 and +14% in 2023, approaching their pre-pandemic level.  At this stage, Western Europe should be close to its pre-pandemic level of business insolvencies by 2022 despite mixed dynamics. While state support will keep insolvencies artificially low in France (32,510 cases) and Germany (14,600) in 2022, the UK could see a sharp rebound in 2022 (+37% y/y to 22,305 cases). Another increase, albeit weaker than in 2021, is expected in Italy and Spain (+6% to 8,990 insolvencies and +8% to 5,550 cases, respectively). Portugal (+2%) and Sweden (+6%) should see a moderate rebound.

Africa and Central and Eastern Europe should both reach a new record level of insolvencies in 2022, notably due to Morocco (+12% to 11,800 insolvencies) and Turkey (+12% to 19,200 cases) while Russia is at risk of seeing a catch-up after the expiration of the moratorium (14,200 cases in 2023). Latin America should not see business insolvencies surpassing pre Covid-19 levels before 2023 despite a rebound in 2022 in Brazil (+15%).

After benefiting from its faster exit from the pandemic and its economic recovery, Asia will also see a trend of diverge. China is expected to keep its annual level of insolvencies under control in 2022 (+1% to 8,750 cases), thanks to a low starting point and despite increased difficulties for companies most exposed to international trade. However, the other countries in the region should see more insolvencies due to the deterioration of the regional and global environment, most often from a low ( Australia, Taiwan) or very low level ( Japan, South Korea, Hong Kong, New Zealand). Singapore and India will stand out, the former being back to a high level (240 cases in 2022) and the latter (1,150 cases) experiencing a strong catch-up from the long suspension of courts.

In this context, the US is the main outlier, with a moderate rebound in insolvencies in 2022 and thus a prolonged low number of cases (15,500 cases). We expect US firms to benefit from the buffers accumulated since the pandemic, through the recovery in profits and importantly the Paycheck Protection Program (PPP) government backed-loan that was in place through 2020 and 2021. Indeed, 92% of the total PPP loan value has been forgiven in full or in part (i.e. USD727bn as of early May 2022) and gradually transformed into subsidies, leading to a drop in the financial debt net ratio (to 18.6% in Q4 2021 i.e. a 10-year low) and a rebound in the equity ratio (to 40.9% i.e. a highest since 2014). However, monetary tightening and the economic slowdown should nevertheless contribute to a larger rebound in insolvencies by 2023 (+23% to 19,130 cases).

In our baseline scenario, business insolvencies are likely to remain at low level in most countries by the end of 2022, and even in 2023, with only one in three countries (15) seeing their number of insolvencies back to pre-Covid-19 levels in 2022, and out in two in 2023. In our adverse “black-out” scenario, we would expect insolvencies to increase further in the Eurozone to +19% and +30% in 2022 and 2023, respectively (+21% and +28% for Western Europe as a whole) and in the US to +16% and +40%, respectively, in the absence of an extension of or additional state aid measures.

Figure 15: US Paycheck Protection Program (PPP), USDbn