Resilience Index, a response to the challenges facing businesses

French companies are suffering the full impact of the Russian-Ukranian conflict: inflation, shortage of raw materials, explosion of energy prices and transport costs... All these obstacles weaken companies and increase tensions in international trade. Ultimately, all of these factors are weighing on companies' liquidity.

Not surprisingly, the various crises have and will continue to have a significant impact on businesses. In order to support economic actors around the world, many governments have put in place aid schemes, notably the French government with its "whatever it takes" policy. In France, this aid is aimed at all sectors of activity and all companies regardless of their size.

Thanks to government aid, the liquidity ratio of French companies has never been so high for the 2020, 2021 and even 2022 accounts (amounting to well over 1). In fact, the number of business failures over the past three years has been contained, particularly among very small businesses (more than 85% of them have used the EMP).

It will be difficult for companies to maintain this upward trend in 2023. The repayment of PGEs, tax and social security debts, supply difficulties and rising prices are all factors that are putting pressure on cash flow today.

In response to this new situation, which is linked to an increasingly complex environment, Ellisphere has deemed it necessary to evolve its resilience index by qualifying liquidity risk further upstream and by revising its sectoral reference framework. This evolution allows companies to have a more accurate view of the current situation of their business partners.

As mentioned in the introduction, the Ellisphere Resilience Index is composed of two indicators.
Let's focus on the first one: the sector indicator.

The Ellisphere team monitors 695 activity codes (out of 732 in the INSEE nomenclature). The analysis systematically places the activity code in its sector in order to understand all the issues at stake, as well as all the impacts, whether they are upstream or downstream of the activity under study.

This sectoral indicator is fed by press monitoring and dedicated tools, as well as Ellisphere's customer feedback and the opinions of its analysts. Corporate failures previously studied on a monthly basis are now monitored on a weekly basis. The Ellisphere team also participates in sector meetings with various analysts and risk managers from both the public and private sectors.

For each business sector, Ellisphere has assigned an index:

• 1: impact of the crisis considered neutral or weak,
• 2: impact of the crisis considered average,
• 3: impact of the crisis considered strong.

The components of analysis are multiple and nuanced. Thus, a sector deemed to be at high risk may very well see some of its sub-sectors perform or even outperform, despite the difficult context...

After having studied the methodology for defining the sector indicator, let's zoom in on the second one: the financial indicator.

The^first version of the financial indicator was based on the 2 legs methodology: "To be in good financial health, a company must rest on two solid legs".

• The first leg is represented by the level of acceptable cash generated by the activity (EBITDA/sales before tax), with regard to the economic model defined by the amount of the company's capital intensity (sum of gross fixed assets and working capital requirements (WCR), compared to sales). A 2% drop in gross operating margin will not have the same consequences for a supermarket as for an automotive supplier. Capital intensity provides a finer reading than the sector, because many companies in suffering activities have been able to reinvent themselves by changing their business model.
• The second leg measures the liquidity of the balance sheet. The Ellisphere team has created a specific liquidity ratio, the Reduced Operating Liquidity (ROL) ratio. More refined than existing liquidity ratios, it truly reflects the assets and liabilities both available and due at the pure operating level.

The^second version of the financial indicator projects liquidity risk to 2023/2024 by further qualifying the reduced operating liquidity ratio.

• Four situations (a,b,c,d) are analyzed according to the upstream level of the reduced operating liquidity ratio.

If the liquidity risk is considered high on the basis of the latest financial statements, will it continue to be high (a) or is a favorable development possible (b)?

Conversely, if liquidity risk is considered low, will it continue to be positive (c) or is a negative development likely (d)?

To answer these questions, a new ratio has been introduced, the financial strength ratio. This ratio, also known as the financial autonomy or financial independence ratio, measures the share of the company's own financing in its total financing, including short-term financing. In the evolution of its resilience index and given the magnitude of current and future structural shocks, the Ellisphere team considers that the minimum threshold for this ratio should be at least 25%.

Several scenarios taking into account the two indicators are translated into a transcoding matrix. The objective is to give a quick vision of the current situation in the form of

This index should not be confused with scoring on the probability of default of companies, which is purely statistical. The resilience index materializes the credit risk inherent in the various crises.

The scoring on the probability of default of companies and the resilience index complement each other. The index acts as an alert that may impact the probability of default in the near or medium term.