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The percentage of Spanish company profits used to pay off debt has fallen by half since the crisis
In 2007 companies earmarked 72.2% of their profits for debt payments and servicing, compared to only 33.2% in 2018
The consolidated debt of Spanish companies peaked in 2010 at an amount equivalent to 118% of gross domestic product (GDP). However, the sudden deleveraging that followed led to a reduction equivalent to 73% of GDP by June 2019, 4.3 percentage points below the eurozone average. In 2010, company debt was 1.2 billion euros, but fell by 29.5% to 0.899 billion euros by June 2019. When in maximum debt, companies needed to allocate 5.4 years of profits to debt payments and servicing (compared to 4.2 years for EU companies), but by 2017 3.3 years was sufficient (slightly below the EU’s 3.7 years).
Those are some of the data analyzed in a monograph titled Condiciones financieras de las empresas españolas: efectos sobre la inversión y la productividad (The financial status of Spanish companies: impact on investment and ) published by the BBVA Foundation and the Ivie. The monograph describes how difficulties in access to financing from the onset of the crisis partially explain the fall in investment by Spanish companies from 2007. The report also describes how subsequently improved conditions have contributed to a recovery in investment rates.
Intense efforts by companies to reduce debt have improved their financial structuring, as, since 2008, the weight of their own resources in total assets increased by 16 points to reach 56.7% in 2018. In 2007 companies earmarked 72.2% of their profits for debt payments and servicing, whereas in 2018, as a consequence of deleveraging and reduced interest rates, this rate fell to 33.2%.
This improvement in the financial health of companies in recent years has been accompanied by less difficulty in accessing financing than in the years of the crisis. According to an ECB survey, in 2011, 25% of Spanish companies encountered obstacles in obtaining credit, compared to only 8% today (a fairly similar figure to the 7.4% eurozone average).
Despite this positive evolution for Spanish companies as a whole, Ivie researchers Joaquín Maudos and Juan Fernández de Guevara warn of the emergence of companies that would be vulnerable in a more restrictive financing scenario, as they only survive thanks to expansionary monetary policies based on very low-interest rates. The debt of these companies is associated with greater risk and these companies may also be co-opting financial resources to the detriment of other more productive companies.
At-risk debt held by these vulnerable companies (whose operating profits are insufficient to cover financing costs) increased substantially from 2007, reaching a high of 42.3% in 2009 and stabilizing at around 40% until 2013. By 2017, economic recovery and falling interest rates caused this rate to fall to 22.8% of total Spanish company debt. This high volatility only highlights how sensitive at-risk debt could be to a scenario of lower economic growth (leading to lower company profitability) and rising interest rates.
In its analysis of companies from the point of view of access to financing, the monograph identified three groups: companies unable to finance investments with outside resources (restricted companies), companies facing difficulties or paying a very high cost to obtain outside resources (relatively restricted companies), and companies facing no difficulties in accessing outside resources (unrestricted companies). Smaller companies have the greatest problems in obtaining credit. In 2017, only 28.6% of microenterprises faced no restrictions in access to credit, compared to 54.9% of large companies (more than 250 employees). In contrast, 20.1% of smaller companies but only 6% of larger companies were fully restricted in access to credit. In general, companies facing greater restrictions are less profitable and more vulnerable, experience lower sales growth and have lower levels of indebtedness.
According to the study authors, the existence of financial restrictions is a brake on the proper functioning of the Spanish economy, as investment levels are reduced when companies have difficulties in accessing finance. In 2017, (a) the investment rate of unrestricted companies was 6.1 and 9 points higher than that of relatively and fully restricted companies, respectively, and (b) 74.9% of companies with negative net investment (gross investment that does not cover fixed asset depreciation) faced some form of financial restriction. A clear relationship, therefore, exists between financing constraints and investment rates.
The monograph also analyzes the impact of finance access on productivity (TFP, total factor productivity). Indebtedness can improve productivity if debt is used to finance investments that are profitable and increase efficiency. However, if debt is excessive, the high servicing costs will have negative repercussions for the proper functioning of a company and will also affect its productivity. The monograph indicates that the negative impact of indebtedness on productivity kicks in when debt exceeds 38% of total liabilities and also reported that 69% of Spanish companies in 2017 exceeded this debt threshold, with the corresponding negative impact on productivity.
The reduction in leverage since the crisis has therefore translated into a source of improved productivity. Simulations performed as part of the research indicate that deleveraging may have generated productivity growth of 3.9% between 2007 and 2017.
