The COVID-19 pandemic has hit the business sector, especially the tourism sector, restaurants, shops and other business which depend on physical social interactions. Many firms have already experienced a decline in their liquidity buffers and equity capital buffers and only emergency loans could prevent many pandemic-hit companies from dire financial distress. Since the pandemic and the lockdown measures have increased corporate indebtedness and at the same time worsened their creditworthiness, the corporate sector will experience three possible, not mutually exclusive scenarios: insolvencies, zombification, and debt deleveraging.

Scenario 1: Insolvencies

Fear of infections reduced the demand for goods and services in several sectors of the economy, while lockdown measures reduced the supply. Many companies did not have sufficient cash balances to pay their current costs, like rent and wages. Therefore, these companies had to increase their indebtedness in order to ensure payments. In case that the pandemic lasts too long, these companies stay indebted without sufficient revenues for paying back their loans. Companies with liquidity problems face the risk that these problems become solvency problems. Thus, it can be expected that the number of insolvencies will increase in the next months.

There are economic sectors in which companies even in normal times face higher insolvency risks than in other sectors. Risks are high in sectors with many small companies, like restaurants or shops, since smaller companies have less financial means to buffer shocks. Insolvencies are less likely in sectors with large companies with many product lines which can better diversify their business risks. Since the companies which are most affected by the pandemic and lockdown measures are restaurants, shops, hairdressers and other smaller companies, aspike in insolvencies can be expected here. But also medium-sized companies affected by the pandemic, like larger hotels or tourism agencies, could run into financial distress in the coming months. Larger companies, like aviation or shipping companies also face declining revenues but are better able to absorb the shock intourism when they have additional business lines not affected by the pandemic. The crucial point is, that most of these companies would have been profitable if the pandemic would not have occurred. These companies running into insolvency is not a cleansing effect, but a destruction of organizational capital. That is why rescue measures are justified.