"Covid resilience index is a response to the crisis"

To face the numerous impacts of the crisis, companies need more than ever a tool to help them secure their business relationships. To meet these challenges,Ellisphere 's teams have worked on a new index for companies to accurately measure the effects of the crisis on economic players: the Covid Resilience Index.

How did the Ellisphere Resilience Index come about?

Alain Luminel: The context in which we are currently living is unlike any other, and raises several questions. Personally, my fears have focused on the economic impact of this crisis. If benevolence was the key word during the first weeks of the shutdown, thanks in particular to the measures put in place by the state, our experience and the precedence of our analyses lead us to imagine a rather dark future for the economy.

Max Jammot: Our reflection took into account different histories, including that of the 2008 economic crisis; knowing that the current crisis is health-related with many other impacts.
We realized that the numerous analyses of the impact of the crisis that are being carried out deal primarily with trends within the main sectors of activity, without really going into detail. It therefore seemed to us interesting and differentiating to deal with all the sectors, incorporating the sub-sectors, the NAF activities in order to analyze in greater detail the direct impacts on all the players.

Martine Bénier: Based on this observation, we wanted to think about indicators capable of anticipating the effects of this crisis on economic players. Many questions arose. We wanted to make a fair and accurate analysis of the data available to us, and not take a speculative approach.

A.L.: This crisis is likely to last. After 2009, the first year of accounting recession since 1945, we saw a continuous rise in insolvency proceedings until 2015. It took France 5 years to recover.

While Ellisphere's probability of default score is a good benchmark of a company's economic health, this type of event remains unpredictable for the algorithms. We have therefore created a credit risk indicator to complement our default probability score.

M.B.: It is currently impossible to predict the exact impact of this economic crisis, the beginnings of which we are only now feeling. Today, the economy is on life support, so the forecasts for insolvencies in 2020, announced to be in the order of +25% to 30%, need to be made more reliable. This is why we thought it would be interesting to work on "real time" economic data measurements, as close as possible to the reality that companies are currently experiencing.

How was the index constructed?

M.B.: Our resilience index allows us to determine how a company will be able to have a "normal" activity and to measure the associated credit risk.

With this, we wish to provide our clients with a specific and adapted response in this more than unprecedented context, and to accompany them as best we can in the challenges that await them tomorrow.

We considered two major indicators: the first, financial, ranks the company according to its capacity to absorb liquidity risk. The second one, sectoral, was built thanks to our regulatory and economic monitoring work.

Currently, these two types of monitoring are frequently juxtaposed. For example: announcements of loans granted to large companies, operating in highly impacted sectors of activity, are the subject of orders published in the JO (Journal officiel).

Ellisphere is fortunate to have teams dedicated to this monitoring that have redoubled their efforts to collect, structure and make reliable the collection of this data, in a context of massive information publications. Our sector indicator, built on this structured and granular analysis, categorizes the sensitivity of the activity of the NAF subclass (APE code) to which the company is attached.

A.L.: To determine our financial indicator, we started with a simple premise: how did companies enter the crisis? With solidity, with elements of fragility, or in great difficulty. To answer this question, we began work and defined two types of company populations. We excluded companies with revenues of more than 250 million euros, because experience has shown that they will be less affected by the crisis, and companies undergoing collective proceedings.

The first major population we focused on was companies with recent balance sheets.

We focused on 2 ratios based on the two-legged principle.

To be in good financial health, a company must stand on two solid legs. The first leg is linked to its operations and its level of cash, translated through the gross operating margin. We have "captured" the acceptable threshold of the EBITDA/sales ratio according to the capital intensity of the company.

The second leg, the company's recourse in the event of insufficient margin, is that related to the liquidity of its balance sheet. We have created a specific liquidity ratio, the Reduced Operating Liquidity (ROL) ratio, which is more refined than the existing liquidity ratios, because it truly reflects the true assets and liabilities that are both available and payable at the pure operating level.

The second population is that of companies for which we lack visibility, either because we have no balance sheets or because the balance sheet is too old. In this case, the sectoral evolution that we follow closely is very important.

M.J.: In parallel with the creation of the resilience index, Ellisphere's economic division has been working on sectoral indicators in order to better analyze the impact of the COVID-19 crisis on the sectors of activity. By taking a global view of a sector, we quickly notice disparities that must be taken into account in the analysis.

Indeed, a sector of activity impacted by the current crisis will likely be accredited with a "sensitive" or "critical" index 2. However, a sub-sector, an NAF activity, may perform very well, or even outperform, despite the difficult context. The components are truly multiple.

It is by respecting this approach that we have been able to set up extremely precise indicators that are analyzed in real time. Our methodology was developed on the basis of the INSEE nomenclature, with the exclusion of a few "non-applicable" activities in order to create our Ellisphere reference list, with different sensitivity indices to the current health crisis.

A.L.: Thanks to these indicators, both financial and sectoral, we were then able to set up a cross-coding matrix to calculate a company's resilience index. It allows us to have reliable and up-to-date data on the situation that economic actors are currently experiencing.

How were the government's support schemes taken into account in the calculation of the resilience index?

M.B.: The government has put in place a very broad range of support measures, covering all sectors of activity and all sizes of company. At this stage, more than 110 billion euros have been distributed through the solidarity fund, tax credits, short-time working, exemptions or deferrals of charges, in addition to the massive 300 billion euros of PGEs (State Guaranteed Loans)... These data have been taken into account in the calculation of the resilience index.

How will this index last over time?

M.J.: This is precisely the challenge of this index and the work we have done with our teams. Indeed, the main objective is to analyze the impact of the crisis on companies in a very detailed way, but also over time. We don't really have visibility on the next few months, but we can nevertheless try to estimate the impact and project ourselves. Some sectors are still at a standstill, others are partially recovering... We also have to take into account in our analysis the different state aids to sectors in great difficulty... Let's also keep in mind that a reconfinement is always a possible scenario.

A.L.: There is an absolute necessity to stick to reality with this index. Companies expect us to be sharp in the information we provide them. This is the challenge that we have faced and will continue to face in the coming months. This pushes us to continue to think further and further ahead in order to better understand the economic issues that await us.