Moody's Corporation · NYSE:MCO
Moody's — Navigating SMEs Webinar (June 2020)
45 slides from Moody's's conference presentation, Jun 30, 2020
Slide 1: Navigating Problem Loans and SME Credit Risk During the Pandemic
Navigating Problem Loans and SME Credit Risk During the Pandemic Mark Zandi, Chief Economist Doug Dwyer, Managing Director Quantitative Research June 2020 Shawn Gregrich, Sr. Learning Partner, MA Learning Services
Slide 2: Mark Zandi: Pandemic Economy
Mark Zandi: Pandemic Economy
Slide 3: Global Recession Is Over…
| Global Recession Is Over...
Slide 4: Global Recession Is Over…
Global Recession Is Over… Global business cycle status as of June 2020 Expansion Recovery At risk Source: Moody’s Analytics In recession June 2020 4
Slide 5: …As Businesses Re-Open…
…As Businesses Re-Open… Google mobility for the workplace, 7-day moving average, 0 = pre-COVID 20 10 0 -10 -20 -30 U.S. -40 U.K. -50 Hong Kong -60 Brazil -70 -80 March April May June Sources: Google, Moody’s Analytics June 2020 5
Slide 6: …and Monetary and Fiscal Support Kick-In
…and Monetary and Fiscal Support Kick-In Assets held outright on the Fed’s balance sheet, $ tril 7 Credit facilities Repos MBS and Agency Treasuries Other 6 5 4 3 2 1 0 06 08 10 12 14 16 18 20 Sources: Federal Reserve, Moody’s Analytics June 2020 6
Slide 7: …But Recovery Will Be a Slog…
2 …But Recovery Will Be a Slog…
Slide 8: Businesses are Shell-Shocked
Businesses are Shell-Shocked % of respondents to Moody’s Analytics global business survey that are … 90 80 Investing Hiring Raising Prices 70 60 50 40 30 20 10 0 03 05 07 09 10 12 14 16 18 Source: Moody’s Analytics June 2020 8
Slide 9: Business Failures and Bankruptcies Mount
Business Failures and Bankruptcies Mount U.S. Chapter 7 & 11 filings, businesses w/ liabilities > $50 mil 35 300 Annual Total (R) 30 250 Monthly (L) 25 200 20 150 15 100 10 5 50 0 0 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Sources: Bloomberg, Moody’s Analytics June 2020 9
Slide 10: ...With Longer-Term Fallout
3 ...With Longer-Term Fallout
Slide 11: Running Out of Fiscal Space
Running Out of Fiscal Space Sovereign borrowing capacity given current yields 450 Norway Circle size=Real GDP, $ 400 Sweden Y-axis: Fiscal space 350 X-axis: Debt-to-GDP ratio China 300 U.S. 250 Spain 200 Russia 150 Italy 100 France Greece Mexico India Brazil 50 Germany Japan 0 Egypt Argentina Turkey
Slide 12: Doug Dwyer: Reopening Businesses After the Lockdown
Doug Dwyer: Reopening Businesses After the Lockdown
Slide 13: Estimated Change in Sales During Lockdown
Estimated Change in Sales During Lockdown By 3-digit NAICS code Estimated using industrial production and retail trade data. Missing sectors are estimated using changes from changes in sector level credit risk metrics, changes in sector employment and changes in sector B2B spending. June 2020 13
Slide 14: Plans Are Useless, Planning Is Indispensable
Former President Dwight D. Eisenhower Said it Like This: “I have always found that plans are useless, but planning is indispensable.” Transitioning to the “new normal” will require planning that considers lost revenue from lockdown and transition periods impact of lockdown on costs government aid fl
Slide 15: Requirements to Successfully Reopen
Requirements to Successfully Reopen Need to return to profitability » Net Income Need to manage liquidity » Cash to Assets June 2020 15
Slide 16: Need to Return to Profitability
Need to Return to Profitability Income Statement When a business is closed, Sales and COGS Sales/Revenue mostly go away as well as Selling Expenses -Cost of Goods Sold (COGS) Some Administrative Expenses, D&A and -Selling, General and Administrative Expense (SGA) Other Operating Expenses will be fix
Slide 17: Need to Rebuild Working Capital
Need to Rebuild Working Capital Assets Liability + Equity Current Assets Current Liabilities Cash Accounts Payable Inventories Current Portion of Long Term Debt Accounts Receivable Total Current Liabilities Other Current Assets Long Term Debt Total Current Liabilities Total Liabilities Property and
Slide 18: Pro-Forma Financial Statements Should Consider
Pro-Forma Financial Statements Should Consider Liquidity Crunch and Government Aid Income Statement Business Balance Sheet Sales/Revenue Scaled Down Assets Liabilities - Cost of Goods Sold (COGS) Cash Short-Term Debt - Selling, General and Administrative Expense (SGA) Accounts Receivable Accounts Pa
Slide 19: Application for US private firms
Application for US private firms Pro-forma statements at end of 3-month lockdown » Key assumptions – Lockdown lasts for 3 months – Sales change during the lockdown estimated on sector level » Compare results without government aid and with PPP grants June 2020 19
Slide 20: Financial Statement Data
Financial Statement Data Moody’s Credit Research Database of private firm financial statements » Use latest financial statement for >55k firms » Distribution of statements across years: June 2020 20
Slide 21: Liquidity Analysis
Liquidity Analysis Cash to Total Assets » Overall liquidity position worsens, distribution shifts to the left » Share of firms with zero cash rises from 3.2% to 27.8% during 3-month lockdown » Incorporating government aid in the form of PPP grants reduces share to 19.8% June 2020 21
Slide 22: Profitability Analysis
Profitability Analysis Net Income to Total Assets » Distribution shifts to the left – Government support is cash that does not appear in income statement, but on balance sheet » Share of firms with negative Net Income rises from 19.2% to 34.9% June 2020 22
Slide 23: Solvency Analysis
Solvency Analysis 1-year RiskCalc EDF » Significate deterioration in EDF implied ratings – Average RiskCalc EDF rises from 1.97% to 2.45% – Median EDF-implied rating worsens from Baa3 to Ba1 » With PPP grants, the average post-lockdown EDF is 2.17% and the median rating is Ba1 » Share of firms rated
Slide 24: Post-Lockdown Recovery Period
Post-Lockdown Recovery Period Paths of selected variables » Sales gradually approach pre-Crisis level » After the lockdown, cash is first used to pay back debt that was taken on, then accumulates June 2020 24
Slide 25: Conclusion
Conclusion To successfully reopen, a business needs to return to profitability and manage their liquidity position. Some firms may not be viable when operating on a smaller scale. Many firms will need assistance from equity investors, governmental aid and lenders to rebuild their balance sheets. Pla
Slide 26: Shawn Gregrich: Navigating Disruption and Developing Personal Capacity
Shawn Gregrich: Navigating Disruption and Developing Personal Capacity
Slide 27: Agenda
Agenda 1. The Trusted Advisor 2. Getting our Bearings 3. What Will it Take to Succeed? June 2020 27
Slide 28: The Trusted Advisor
1 The Trusted Advisor
Slide 29: To Be a Trusted Advisor, You Need to Know What You're Up Against
To Be a Trusted Advisor, You Need to Know What You’re Up Against… and It Will Vary; A Lot Source: Moody’s Analytics, Reopening Main Street June 2020 29
Slide 30: Trusted Advisor
Trusted Advisor The data suggests a couple things: 1. Many firms, in many industries, are going to “stumble.” 2. “Problem loans” are predicted to rise by 2 to 4 times traditional rates. … so, then, not every “stumble” will lead to a significant problem, but there will be enough you can’t simply rely
Slide 31: Trusted Advisor, cont'd
Trusted Advisor, cont’d You’ll need strong knowledge and skills with regard to… » Qualitative analysis in strong concert with flexible quantitative analysis (because the numbers may be so distorted). » Government assistance programs and parameters and their applicability to your borrowers. » Bank po
Slide 32: Getting our Bearings
2 Getting our Bearings
Slide 33: Credit Deterioration May Be Rapid
Credit Deterioration May Be Rapid… - time is of the essence! Average time to crisis Average time to decide to intervene Time in a recession Lots of options Quality Credit Very few options Time Source: Moody’s Analytics, Problem Loans, elearning ** Act quickly! June 2020 33
Slide 34: The Restructuring Process
The Restructuring Process » EWS… » Taking Action June 2020 34
Slide 35: Assessing Viability
3 Assessing Viability
Slide 36: The Lender's Mantra!
The Lender’s Mantra! Your focus should be on liquidity and cash flow! June 2020 36
Slide 37: The Lender's Key Decision…
The Lender’s Key Decision… Viability? No Yes Contingency Planning Changes Needed? Insolvency Can it be done? No Yes Exit Route? Action June 2020 37
Slide 38: The Big Picture – Top Strategies
The Big Picture – Top 10 Strategies Any business plan will need to include some or all of the following: Does management instill confidence they can communicate and carryout their plans? » Change of management » Asset reduction » Strong financial control » Cost reduction » Organizational change » De
Slide 39: Industry Competitive Advantage
Industry Competitive Advantage Key issues: 1. What’s the strategy to build on the firm’s Competitive Advantage? a. Product Differentiation b. Customer Intimacy c. Low Cost Provider 2. How well did they (industry/market rank), and will they, compete with that strategy going forward? Why? 3. What is t
Slide 40: Viability: Industry Considerations
Viability: Industry Considerations Industry Strategy for Comp. Strategy Cost Structure Advantage Execution Viability Manufacturing Wholesale / Distribution Retail Service (e.g. Physician practice) June 2020 40
Slide 41: Solvency Test
“Flight to Credit” Fundamentals Bias to Pass FAIL 1. Is the business SOLVENCY TEST viable? FAIL 2. How much cash will it produce? How confident are PASS Bias to Fail you, really? PASS 3. Is the associated debt service acceptable? PASS FAIL LIQUIDITY TEST June 2020 41
Slide 42: Credit: Man's Confidence in Man
Credit: Man’s Confidence in Man “Commercial credit is the creation of modern times and belongs in its highest perfection only to the most enlightened and best governed nations. Credit is the vital air of the system of modern commerce. It has done more — a thousand times more — to enrich nations than
Slide 43: Q&A
Q&A Further Questions? Contact us at [email protected] June 2020 43
Slide 44: moodysanalytics.com
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Slide 45: © 2020 Moody's Corporation
© 2020 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liabilit