The governor of the Bank of Spain, Pablo Hernández de Cos, has made an X-ray of the Spanish business sector this Wednesday that has led him to point out that “around half of the companies have losses this year”, during a conference in ‘The European Money and Finance Forum’.
It’s solvency, you stupid! After winning the combat of liquidity, comes the challenge of avoiding the fall of thousands of companies
In a speech focused on the liquidity and solvency of Spanish firms, the head of the supervisory institution added that “Spanish non-financial companies have been severely hit despite the policy measures adopted by national and supranational economic organizations” . Hernández de Cos calls for the current phase of the crisis, “characterized by an incomplete and uneven economic recovery,” to maintain “public support for companies”, but “these policies should be adjusted to focus more on companies operating in sectors that are still heavily affected by the crisis and prioritize support in the form of grants or temporary capital injections “in addition to improving” debt restructuring mechanisms.
The data provided by the Governor of the Bank of Spain is significantly worse than that provided by the institution in the Quarterly Survey of the Central Balance Sheet, which showed that during the first half of the year the average return on assets (ROA) of companies had fallen 2% compared to 2019 and the percentage of companies that posted losses increased by more than 11 percentage points, to 37%.
Hernández de Cos admits that the government’s fiscal support measures such as loans guaranteed by the ICO “have focused on avoiding the materialization of liquidity risks” and, although he qualifies this policy as successful, he also adds that companies have accumulated a lot of debt: “Further accumulation of debt could prove unsustainable for companies that were already in this situation. Here, public support in the form of temporary capital injections could be an option to explore, especially in the case of large companies. where this option seems more feasible. The Spanish Government has already created a public fund that can be used for that purpose. In the case of other companies, the possibility of granting direct subsidies could be considered. ”
The governor emphasizes that “in the relationship between debt and profits, the proportion of companies in a more vulnerable situation will increase significantly due to the sharp reduction in income. In particular, the percentage of companies with a net debt of more than 10 times its earnings, or with positive net debt and negative earnings, it will increase by more than 15 percentage points. In the sectors most affected by the pandemic (tourism, restaurants, leisure and motor vehicles), this figure will increase by more than 40 points “.
It also adds that “the proportion of companies with a high ratio of net debt to net assets – above 0.75 – is expected to increase by around 7 percentage points.” Although the governor of the Bank of Spain downgrades it, calling it “modest given the size of the shock”, he also adds that companies operating in the sectors most exposed to the crisis will see a worsening of their solvency situation, “with an increase in the proportion of companies with a high debt / asset ratio of more than 20 percentage points. ”
Regarding the credit rating, Hernández de Cos emphasizes that they reflect the “deterioration in the quality of the companies’ credit.” Although the downgrades “have affected a smaller proportion of companies compared to the global financial crisis,” the governor explains, he also points out that there may be “another wave of downgrades if the economic outlook deteriorates significantly. Past experience shows that credit rating downgrades below investment grade in the corporate sector can have adverse side effects that exacerbate crises. ”
Despite the outlook, Hernández de Cos points out that “the longer maturity and lower interest rates of the new loans granted during the crisis, compared to the pre-existing debt, are important mitigating factors, since they contribute to reducing the burden of corporate debt “, in addition, that the loans guaranteed by the ICO” include a grace period of one year, which also helps to reduce the burden of short-term debt. ”
Despite this margin, the head of the monetary institution insists that “debt restructuring could be a beneficial option for both lenders and borrowers in the case of heavily indebted companies with a viable business.” Hernández de Cos points out that “insolvency mechanisms should be improved to make them more efficient. In Spain, these procedures tend to be very long, taking an average of three and a half years, destroying the value of the company in a process, which in many cases eventually lead to the liquidation of the firm. ” To avoid this problem, the governor proposes to “encourage extrajudicial settlements” and add more resources to specialized courts to speed up the resolution of these processes.