Our past research has identified three leading indicators that can help detect corporate distress four years before a bankruptcy: profitability, 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 unemployment schemes) and tax deferrals fully covering non-financial corporates’ losses in value added from 2020.
Without state support, the share of fragile SMEs would have been much higher in France and the UK, at 17% and 26% respectively, as margins would have lost more than -5pp. Interestingly, in Germany, the share would have remained relatively stable despite a shock of close to -3pp for margins from peak to trough. This is because fragile SMEs in Germany have worse financial 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, electronics 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 manufacturers proved to be more resilient.