The prospects are bleak. With a view to the rapidly increasing number of infections, economists are forecasting a significant downturn in the economy in the coming months. The state development bank KfW revised its gross domestic product forecast for the current year down from three percent to 2.6 percent at the end of November. The development bank expects the economy to stagnate in the winter half of 2021/2022. “Even if there is a nationwide lockdown again, I assume that the company’s liquidity supply is secured across the board. The decision to extend the federal government’s corona aid until March 2022 will also help,” says Fritzi Köhler- Geib, chief economist at KfW.
The demand for credit has plummeted
Dealers, service providers and producers are threatened with total failures again, which already affects restaurants and fitness studios, which had to close in Bavarian hotspots, for example. It is still unclear how these developments will affect the financing situation in SMEs. Experts expect the existing conditions to solidify, and these will vary greatly depending on how affected you are by the pandemic.
Recently, corporate credit demand has plummeted. According to the development bank’s current SME panel, the proportion of companies applying for a loan from banks fell to a record low of under 18 percent. “The credit channel is not closed, but the companies ask for little outside capital. This is especially true for medium-sized companies, but also for large companies,” says Köhler-Geib.
The demand for state corona aid also declined. In the first nine months, KfW granted loans amounting to 4.5 billion euros. In a year-on-year comparison, it was more than five times as much at 26.1 billion euros. Despite falling demand for outside capital, the credit barriers for medium-sized companies are rising again at the same time. “Economic risks and delivery problems have a full impact on certain business models, and this affects the classic problem sectors of the hotel and hospitality industry as well as all tourism-related businesses and the manufacturing industry,” says Dirk Schiereck, Professor of Corporate Finance at TU Darmstadt.
Machines, vehicles and systems that are needed to manufacture goods are also currently in short supply.
(Photo: Stefan Puchner / dpa)
The risk is often too great for the banks. In a KfW survey, one in four companies said they had problems accessing credit – more than twice as many as in the previous year. The service and retail sectors in particular are reporting problems. The latest Bank Lending Survey conducted by the European Central Bank among 146 European banks shows that banks are tightening their guidelines for issuing corporate loans. After a slight tightening in the third quarter, the financial institutions are also planning a more rigid approach in the fourth quarter. Small and medium-sized enterprises are particularly affected by this.
“Large companies had more options to react to declines in sales, for example by adapting the cost structure or switching to digital sales channels, and they made use of these”, says Köhler-Geib. Tougher banking rules for small and medium-sized businesses will continue after the pandemic. Because the proposals recently submitted by the EU Commission for stricter capital adequacy rules for the Basel III reform will result in stricter requirements, especially for companies without an external rating.
The interest rates for long terms are rising
In view of the low interest rate policy of the European Central Bank (ECB) for years, debt capital has been cheap for years. Their EUR 1.85 trillion bond program, which they launched against the pandemic shock, ensures that companies can lend cheaply and keep interest rates low.
However, interest rates are now showing a slight upward trend with long maturities. The Barkow index for corporate loans with a five-year term, based on Bundesbank data, rose by 0.41 percentage points to an average interest rate of 1.76 percent at the end of October. “In difficult phases like these, the interest rates for long terms always rise, and the credit spreads for bad credit ratings go up. Companies have to be prepared for the fact that in the next six months there will be more than one percentage point before the decimal point,” says Schiereck.
Despite negative interest rates, some companies hold high reserves
Companies affected by the Corona crisis have lost important financial reserves, which is also noticeable in their ratings. More than a third of the companies participating in the KfW company survey 2021 reported a deterioration in creditworthiness, and 39.5 percent of the companies had lower equity. “For SMEs as a whole, we see that the equity ratios, the most important indicator of creditworthiness, have only deteriorated very moderately. In view of the deep crisis, actually less than expected. But you can also see that companies with ten or fewer employees are already disproportionately affected of burdens on equity, “says Koehler-Geib. Financing instruments that conserve equity, such as leasing, retained earnings and deposits, can counteract this.
How inconsistent the picture is is shown by the simultaneous increase in liquidity reserves that companies built up during the crisis. According to Freshfields Corporate Cash Barometer, 688 billion euros are in bank accounts and cash on hand – despite negative interest rates of minus 0.11 percent at the end of September.
In addition to the penalty interest, inflation is a burden on companies’ assets. In November the rate of inflation climbed to 5.2 percent. The ongoing supply bottlenecks have now also led to higher consumer prices, says KfW chief economist Köhler-Geib. “Regardless of this, we are seeing significant price increases on the energy market. Both will have an effect through the winter, and I am therefore initially only assuming a gradual decline in inflation in the new year,” says Köhler-Geib. In October, energy costs 18.6 percent more than a year earlier.
Empty shipping containers in England. The persistent delivery bottlenecks in many places are causing prices to rise.
(Photo: Dan Kitwood / Getty Images)
Despite a high capital cushion, many companies are reluctant to invest. If companies receive material and preliminary products at all in view of the bottlenecks, then at significantly higher prices. Machines, vehicles and systems that are needed to manufacture goods are also in short supply. “Companies that are sitting on liquidity reserves always ask themselves when the right time is to start an investment. For many, the framework conditions are simply unfavorable. But if you run a delivery service and want to order ten new vans quickly, you get it they don’t, “says Schiereck.
In the previous year, the pandemic had already considerably dampened SMEs’ investment mood. According to KfW, never before have so many small and medium-sized enterprises failed to implement their original investment plans. Only small investment projects to adapt or maintain business operations were made. Overall, according to the latest KfW report, new investments by medium-sized companies fell by 14 billion euros to 173 billion euros in the previous year.
The business situation remains uncertain in the New Year, says Köhler-Geib. The state framework conditions, for example for the green transformation, are often still unclear. “The question of what the new federal government intends to do with the CO2 price, for example, in order to achieve the specified climate targets, is of central importance for companies,” says Köhler-Geib. The companies are also hoping for more clarity on this issue.