Image of dark night with lightning above stormy sea
© Sergey Nivens / 123RF Stock Photo

The lack of insolvencies in the face of extreme economic disruption has been a hallmark of the Covid-19 crisis, but Fitch Ratings expects a surge of bankruptcies among small and medium-sized firms over the next couple of years.

In a new report, the rating agency said that government supports, forbearance arrangements and the impact of public health restrictions on bankruptcy processes have “artificially depressed” bankruptcies over the past year.

Looking ahead, however, it said insolvencies “are set to rise significantly in 2021 and 2022” once these factors are scaled back globally.

In particular, it sees bankruptcies surging among smaller companies.

Fitch said that bankruptcy filing trends in the U.S. last year point to a possible “backlog of failures among smaller firms.”

It also noted that the small company failures in 2020 were “at odds with the rise in high-yield bond defaults.”

While insolvency numbers are seen rising in the next couple of years, Fitch said it expects fewer bankruptcies than in past crises.

“Our analysis suggests business insolvencies could be one-third to two-thirds lower than in previous crises,” it said. “This crisis should be shorter and less broad in its impact than previous crises, with certain sectors acutely affected and others benefiting.”

Additionally, a variety of government supports has eased financial pressure on firms.

“Favourable financing conditions and ultra-low interest rates have enabled businesses to meet liquidity needs, build cash buffers and push back debt maturities,” it said. “This has helped viable firms avoid liquidity issues of the kind that might have caused failure in previous crises.”

With credit losses expected to rise, Fitch said it expects banks’ non-performing loans to peak in 2021–2022.

“A faster-than-expected surge in [small company] bankruptcies and non-performing loans could tighten credit conditions, weighing on the recovery,” it said.