Coface Shares Analysis on Covid-19 and the ‘Zombie’ Economy

On 24th November 2020, the Directors at Coface UK & Ireland shared their insights on corporate risk in the current environment, the impact of recent legislation, changes to insolvency laws and rising fraud cases including tips on tackling fraud.

In part one of the webinar John Nicholas, Underwriting Director, discussed the management of corporate risk in the current ‘zombie’ economy. Coface forecasts global GDP growth to be -4.8% by the end of 2020 which would be the worst contraction since WWII with the UK expected to shrink by 11.4%. From the Coface estimates the UK and Europe do appear to have been hit harder by events in 2020 compared to the BRICS economies.

Covid-19 caused a severe demand shock to the UK and other global economies which led to this recession. However, Coface compared insolvency data from 2019 to 2020 and corporate defaults in 2020 have decreased. The volume of Coface claims and reported payment overdues have also slowed significantly in all but the most high-risk industry sectors, due to:

  • the unprecedented government support such as the furlough scheme which has delayed the full effects of the recession,
  • large increase in financial leveraging such as new borrowings including CBILS or deferment of debt obligations,
  • temporary and permanent changes to regulation and insolvency legislation which aim to save viable businesses from being forced into compulsory winding up petitions.

Nicholas described how these factors have led to the phrase ‘Zombie’ economy with relatively few companies showing the signs of distress that would have been expected at this this point in the pandemic. From the Coface estimates, the intervention from the government is delaying the inevitable corporate defaults, the timing and severity of which will be driven by the level and period for which the support remains in place. When state intervention is reduced or removed then the expectation is that weaker companies will become vulnerable. Coface then estimates that by the end of 2021 global business insolvencies could be 32% higher than 2020.

This ‘Zombie’ economy creates underwriting challenges for Coface and the rest of the insurance market. Risk underwriting and insurer buyer ratings rely on statutory financial information. In the UK regulatory changes allow companies an additional 3 months to file accounts which makes up to date information less obtainable. Furthermore, the information that is available predates the pandemic so does not provide an accurate indication of the current health of businesses. It is therefore becoming increasingly important for insurers to obtain up to date management accounts and propriety information from businesses to make an accurate assessment of the risk. Companies in affected industry sectors, in addition to increasing their borrowing, are utilising cash reserves which is weakening liquidity. Many companies are also reducing turnover estimates in the short term. Alongside this, the unknown outcome of the Brexit negotiations is creating further uncertainty and challenges for underwriters when assessing risk.

The growth forecasts and insolvency estimates by Coface have been heavily caveated by the Directors. This pandemic is on a global and unprecedented scale with many uncertainties domestically and internationally. Current estimates from Coface forecast a global GDP growth of 4.4% with 7% in the UK in 2021. These should be considered best estimates with the data available today. The recent vaccination breakthroughs could bring a crucial boost to the global economy and boost consumer confidence in 2021 to further support the recovery.

You can find the Coface presentation and recording below:

Presentation

Recording

In the next FinCred News update we will share an overview of recent changes to insolvency laws.

Post Date | November 27, 2020
Post Author | Hannah Lyon-Wall