How to estimate the impact of the lockdown on your company

65% of Italian companies will experience a significant increase of their probability of default.

Hard times are coming for Italian companies.
A recent analysis performed by modefinance estimated that, due to the Coronavirus epidemic, 65% of Italian companies will experience a significant increase of their probability of default.

Specifically, in case of a generalized decrease in turnover of 10%, the probability of default of companies belonging to the rating classes B and B (46%) may triple, while companies rated A and BBB, which now fall into the investment-grade category, would be downgraded to the speculative level already in the event of a generalized decrease in turnover of 4%. 

The outlook is worrying, but being aware of the implications can help entrepreneurs to develop an appropriate business and credit strategy to tackle the coming months.

To read the analysis properly, some clarification should be made. First of all, both the scenarios envisage a decrease in turnover that would affect all the sectors equally, not only those most affected by the restrictive measures. Besides, the analysis does not take into account the financial aids allocated by the Italian Government to mitigate the economic repercussion of the lockdown.

In other words, the impact of the lockdown on each company can be very different from what macroeconomic analyses suggest. Entrepreneurs are now urged to assess the repercussions on their business by: 

  • measuring how much a shutdown or slowdown of the production would impact on the cash flow and turnover;
  • estimating how much clients' payment delays affect the liquidity reserve;
  • verifying the consequences of a bottleneck in the supply chain on the monetary cycle;
  • assessing the company’s debt capacity and the credit strategy to be adopted. 

To allow entrepreneurs to estimate the economic impact of the lockdown on their businesses, modefinance provides an analysis of the company's performances through the forecasting and stress testing model For-ST .

The model, already available within modefinance's Rating-as-a-Service platform, can perform budget simulation up to 5 years based on three different scenarios and to stress-test key variables (such as turnover, financial debts, and monetary cycle).

Through For-ST, modefinance can simulate how much a drop in turnover would affect the company's rating and probability of default and analyze the customers' and suppliers' portfolio to identify critical issues within the supply chain. The analysis examines different scenarios, allowing entrepreneurs to define a business strategy aimed at damage containment. 

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