Tracking Greek corporate balance – sheets in and out of the pandemic: Improved ratings but “pockets” of financial distress will linger

From Pre-COVID-19 Stability to COVID-19 Recession

Two years ago, we made our first attempt to simulate the impact of the COVID-19-induced recession on the balance sheets of Greek corporations, with special emphasis on their profitability, liquidity and solvency. At that time, our assumptions regarding the impact of the recession and lockdowns on the turnover of various sectors of the Greek economy were guesses.

Now that ELSTAT has published the final data regarding the sectoral breakdown of turnover data of the Greek economy for 2020, we have revisited our study using actual data on sectoral corporate turnover. In doing so, we simulated the impact of the turnover decline (and in some cases increase) on the balance sheets of 12,236 Greek corporations in our sample and now report our findings in terms of P&L, liquidity and capital impact.

Additionally, we used our proprietary corporate rating model, the Enterprise Rating System (ERS), to estimate the COVID-related recession on the credit quality of Greek corporations.

Post-Pandemic Recovery

Looking forward, we wanted to estimate the post-pandemic recovery of the Greek economy and the Greek corporate universe. Therefore, we again assumed a hypothetical level of sectoral turnover recovery and ran our equations the ‘other way’—from recovery (i.e. turnover increase) to profitability and rating upgrades rather than from recession to losses and rating downgrades.

We believe that our framework worked quite well, with one exception: liquidity. The liquidity position of Greek corporations was boosted in several active and passive ways that could not be captured by our methodology. Policies that have actively improved the liquidity position include subsidised and guaranteed bank loans and seven rounds of the so-called ‘refundable advance’. Passively, liquidity pressures were alleviated via postponement of tax and social security obligations, loan repayment moratoria and employee furlough programmes.

For all of the above reasons, our liquidity reflects potential funding needs in the absence of state support. As such, these data should be treated as a worst-case scenario (i.e. placing an upper limit on liquidity contraction) rather than a baseline scenario.

Notably, the publication of the 2020 (let alone the 2021) corporate financial statements is still lacking for many firms. Hence, with our simulation analysis, we tried to bridge this informational gap and estimate the impact of the pandemic on business, leading to useful conclusions for the corporate universe.

Based on microsimulations of 12,236 Greek corporations

In 2020, turnover declined by €11.5 bn (-10.8%) and recovered by €5.1 bn (+5.4%) in 2021. It was lower by €6.4 bn (-6.1%) in 2021 compared to pre COVID-19.

In 2020, EBITDA declined by €6.6bn (-64.5%) and recovered by €5.8 bn (1.6 times) in 2021. It was lower by €811 mn (-7.9%) in 2021 compared to pre COVID-19.

In 2020, cash reserves increased by €3 bn (+22.9%) and by €7.4 bn (+4.6.2%) in 2021. They were higher by €10.4 bn (+79.6%) in 2021 compared to pre COVID-19.

In 2020, equity declined by €3.5 bn (-6.1%) and increased by €2.3 bn (+4.2%) in 2021. It was lower by €1.2 bn (-2.1%) in 2021 compared to pre COVID-19.

Assessing corporate financial distress

In 2020, in total, 59.6% of firms were estimated to have losses with €4.6 bn in net losses (before depreciation and amortisation –D&A), while the rest firms were profitable with net profits (excl. D&A) of €5.3 bn. Of the 12,236 firms in our sample, 25.7% had a negative cash position (cash shortfall) of €2.3 bn. In our sample, 26.2% of firms recorded a working capital shortfall of €2.9 bn.

In 2021, 22.3% of firms were estimated to have losses, with net losses (excl. D&A) of €1 bn, while the rest firms had net profits (excl. D&A) of €7.5 bn. This trend marked an improvement compared with 2020 in terms of both level and share, signalling the gradual return of the companies to their pre-COVID-19 status. Of the 12,236 firms in our sample, 14.6% had a negative cash position (cash shortfall) of €921 mn. In our sample, 13% of the firms recorded a working capital shortfall of €843 mn.

Examining equity stress

Despite the improved income and mitigated liquidity pressure in 2021 compared to 2020, firms were not left unscathed. In 2021, firms with negative equity estimated to be 15.8%, up from 12% pre-COVID-19. The level of negative equity expanded by 96.7% in 2021 compared to the pre-COVID-19 period, resulting in a total negative equity of €5.3 bn. In other words, we estimated an additional €2.6 bn equity gap during the pandemic. In our sample, 4.4% of the firms were ‘scarred’ by the pandemic, given that they had positive equity pre-COVID-19 but negative in 2021. Nevertheless, 83.6% of firms that were solvent pre-COVID-19 remained solvent in 2021.

Stress testing our ERS

In 2020, a massive number of companies saw a deterioration in their ratings. After the macro improvement of 2021, most companies returned to their pre-COVID-19 ratings. However, we recorded a higher concentration at the edges of the distribution in 2021 compared to pre-COVID-19 (i.e. to ‘a’ and ‘d’ ratings).