Jumping to conclusions

Use restraint when applying the limited amount of company data out there to draw conclusions about Dutch corporate health.

Today’s front page article in the FD contains some conclusions that are quite remarkable to say the least.

Bankruptcy as a panacea?

The article starts out with the bold statement that bankruptcies would actually benefit the economy by freeing up human resources that would otherwise not be available to other companies. That is a peculiar assumption as it would seem to suggest that a company that goes bankrupt could not have been adding value to the state of the economy, neglecting to address the actual cause of a bankruptcy in the process.

The article continues by stating that the number of bankruptcies currently is still at a historical low, furthermore adding that this number is not expected to go up substantially in the short term. COVID related government support is referenced as the cause, the aid having had a positive effect on companies’ health. As an indicator for enterprise health the article furthermore refers to the fact that risk ratings (measure for the risk of bankruptcy) in general actually seem to have improved.

This conclusion feels somewhat awkward.

First, what is being suggested? Are bankruptcies actually a blessing in disguise for labor mobility or not? Or is the implicit message that the number of bankruptcies is artificially low due to government support and therefore any aid is to be ceased in order for companies to die from a “natural” cause?

Lack of (reliable) company data

Secondly, the reliance on the improved risk ratings in determining the health of companies begs the question, what information are these risk ratings actually based upon? Reliable company data is scarce and has been for some time. Particularly in relation to small enterprises (the vast majority of SMEs in The Netherlands), data is often outdated, lacking detail and has not been audited. Hence, particular caution is required when interpreting ratings that use such a limited data source as input. In other words, a risk rating in itself is not exactly the sharpest tool in the shed when it comes to determining corporate health.

As mentioned before, this is not a new phenomena. A call to action has been instigated on several instances. Earlier this year a recommendation was made to the Dutch Ministry of Economics and Climate (EZK) for setting up a SME credit register, in order to develop the granularity and the quality of company data, serving to improve the reliability of the risk ratings as a result. Lawmakers would do well to pick up this gauntlet if serious about improving conditions for SME finance in The Netherlands.

Funding gap

SME finance capability (or lack thereof) is actually one of the most relevant and worrying indicators in predicting future bankruptcies or voluntary closures.

The problem is that due to the retreat of traditional credit providers, ever since the last crisis, SMEs have not been presented with alternatives that can meet their demand for growth capital. Solid enterprises have been capable of staying afloat during the last crisis and the pandemic, however with flat or ever decreasing financial margins.

Without a genuine effort to shore up finance capacity for SMEs, to bridge the gap that is currently out there, the number of bankruptcies can indeed be expected to rise over time. Hopefully there will be plenty of enterprises left to employ all available staff.

The article would be correct in stating that due to a combination of corporate resilience and government support, companies in general are more or less in the same position as before the pandemic. However, that was really not such a good starting point to begin with.