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COVID-19: Assessing The Credit Risk Impact On Small- And Medium-Enterprises (SMEs)


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COVID-19: Assessing The Credit Risk Impact On Small- And Medium-Enterprises (SMEs)


The COVID-19 pandemic and associated shutdowns have had far-reaching impacts, affecting economic growth around the world. According to S&P Global Ratings, coronavirus containment measures that have been underway may lead to a global recession this year. A cash flow slump and poor financial conditions, combined with the oil price shock, will hurt creditworthiness and may result in a surge in defaults for the rated universe.[1]

However, what impact will the pandemic have on the creditworthiness of the unrated universe? COVID-related pressures are likely to lead to an increase in defaults of SMEs that are expected to feel the burden more than other companies (i.e., those with a larger market capitalization or better access to credit). Surveys[2] have shown that the impact could have different country-by-country implications. Some countries may experience a larger impact to slower sales by SMEs (such as the U.S.), while others, that rely on exports, may experience supply-chain disruptions, such as Korean and Japanese companies that are affected by closures of factories in China. The magnitude will also vary by industry and company size. With the level of uncertainty we are facing and the implications for SMEs, it will be important to closely monitor the creditworthiness of these companies.

S&P Global Market Intelligence’s Credit Assessment Scorecards provide the tools to help identify and manage potential default risks of private, publicly-traded, rated, and unrated companies and government entities across a multitude of sectors and geographies. The Corporate SME Scorecard helps address the inherent challenges of assessing the credit risk of these smaller, typically unrated entities. This Scorecard provides:

  • Identification of potential default risk through a granular 20-point rating scale. Users can generate probability of default (PD) values for corporate portfolio(s) and perform sensitivity analysis, scenario analysis, and stress tests.
  • A consistent framework for calculating credit risk via a Microsoft Excel®-based model.
  • Credit scores that are designed to broadly align with credit ratings by S&P Global Ratings,[3] and are further supported by historical default data dating back to 1981.
  • A detailed view of credit risk by combining point-in-time factors with qualitative factors, converging trends, and relationships between key drivers.
  • Leading benchmarks that include over 140 industry and country risk scores.

SME Scorecard Framework

Source: S&P Global Market Intelligence. For illustrative purposes only.

Four things to consider when analyzing the credit risk impacts of COVID-19

There are four main Scorecard areas that can reflect the potential impact of COVID-19 on credit risk. For simplicity, we follow the Scorecard’s structure, as presented in the diagram above, in highlighting the relevant features.

  1. 1. Country and Industry Risk Scores (CRS and IRS), and the extent to which they are meant to capture the asymmetric impact on certain industries.
  2. 2. Business and Financial Risk, which should reflect updated macro and entity-specific forecasts.
  3. 3. Liquidity, a short-term concern that includes falling cash inflows and difficulties to roll-over, refinance, or extend credit facilities.
  4. 4. Government emergency financing and support.

Systematic Risks: Country and Industry Risk


Our CRS are structural long-term risk indicators, addressing the economic risk, institutional and governance effectiveness risk, financial system risk, and payment culture or rule of law risk in the countries in which a company operates.[4] Whilst CRS remain fundamentally unchanged in the short-term, we will monitor the expected impact of COVID-19 on public finances and other indicators and how it may affect CRS.

It is yet unclear if COVID-19 will have a differentiated impact on countries, given that many are at various stages of the virus penetration – although countries with the strictest containment measures may likely see the swiftest reversals, but they may also endure extensive economic disruption. The economic damage associated with the outbreak is nonlinear. This means, for example, that if containment takes twice as long as expected, the economic damage will be more than twice as bad. Because of this, a recovery could take longer to happen and be weaker (with more lost output) than projected.[5]


IRS give analysts a starting point in assessing credit risks in a specific industry/sub-sector. IRS are derived from industrial cyclicality and competitive risk and growth, which is a theoretical median level of risk inherent to a given industry, considering its entry barriers, level and trend of industry profit margins, risk in growth potential, risk of secular change, and substitute products.

In case an industry’s relative positioning and profitability is sustainably weakened at the macro level due to prolonged travel restrictions and a permanent shift in consumer behavior caused by COVID-19, S&P Global Ratings is likely to review industry risk. In addition, S&P Global Ratings has published a ranking of revenue/EBITDA sensitivity by sector, from ‘high’ to ‘low’, which can inform industry risk assessments through the Scorecard.[6]

Business and Financial Risk

COVID-19 is causing a material decline in demand for products and services, and a deterioration in company cash generation. The degree of this disruption can be captured by quantitative factors in the Business Risk – Profitability assessment (e.g., Return on Capital, EBITDA margin, and Volatility of Profitability), Operating Efficiency Assessment (e.g., Cash Conversion Cycle and Expense Ratio), and Financial Risk – cash flow ratios (e.g., FFO/Debt and Debt/EBITDA) via our Corporate SME Scorecard.

Liquidity Modifier

Analysts can update their views on an SME’s financing needs, plans, and alternatives, as well as their flexibility to accomplish their financing program in the current environment without damaging creditworthiness. Since many SMEs often rely on informal sources of capital, such as cash from family and friends, it is important to assess their flexibility to accomplish their financing program under stress without damaging their creditworthiness or impacting payment behavior.

Management & Governance Modifier

The modifiers for Management & Governance and its respective guidelines could also help monitor and assess management's effectiveness during the current environment. SME management should assess its level of risk, measure the potential impact of disruptions, and develop an effective risk and contingency system for the business operation. Special attention should be paid to financial reporting, especially when there is a lack of transparency regarding a borrower’s current and expected financial situation. For example, under downturn conditions, SMEs should create financial scenarios projecting financial statements for the next period (or at least the next few months), which may increase transparency to lenders and even uncover opportunities to reduce costs. In downturn conditions, we would expect an increased scrutiny of the financial reporting and transparency, both in terms of credibility as well as adequacy in shedding light on the true financial condition (current and expected) of the enterprise.

How to account for governmental support extended in the context of COVID-19

In response to the COVID-19 pandemic, central banks and governments have deployed unprecedentedly large fiscal and monetary policy packages to help workers and companies bridge the gap to recovery. These emergency measures have typically included:

  • Government loan guarantees aimed at helping businesses and mortgage lenders deal with the containment and avoid a more severe rise in nonperforming loans and defaults.
  • Short-time working schemes, as introduced by Germany, France, Italy, and the U.K. to subsidize companies' payrolls to prevent employers from reducing staff in response to a temporary fall in activity.
  • Helping businesses access credit through banks or the market, and that the cost of funding remains manageable.

Within the Corporate SME Scorecard framework, the effects from general support measures on a corporate obligor’s credit assessment will be best captured in the Financial Risk Profile. This should be accomplished by incorporating relevant applicable support in the financial metrics through forecasts, as described above, as well as in the analysis of financial flexibility and payment behavior. Generally, this would be done as part of the standalone assessment, rather than as an overlay.

To learn more about how our Corporate SME Scorecard can help you assess the credit risk impacts of COVID-19, get in touch.

[1] “COVID-19 Credit Update: The Sudden Economic Stop Will Bring Intense Credit Pressure”, S&P Global Ratings, March 17, 2020.

[2] OECD, SME Policy Responses, March 30, 2020.

[3] S&P Global Ratings does not contribute to or participate in the creation of credit scores generated by S&P Global Market Intelligence. Lowercase nomenclature is used to differentiate S&P Global Market Intelligence credit model scores from the credit ratings issued by S&P Global Ratings.

[4] S&P Global Ratings, Corporate Methodology. Date: 19 November 2013

[6]See Appendix 1:
Sector Sensitivity to COVID-19 and S&P Global Ratings, Empty Streets and Rising Risks. Date: 30 March 2020

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