RapidRatings® Study Finds Industrial Defaults at Five-Year Low, Energy & Retail Sectors Lag
August 6, 2019
FHR® is a Predictor for Supply Chain Resilience
New York, NY – August 06, 2019 – RapidRatings, the leader in financial health analytics, today released the results of its 2019 Annual Default Review, Supply Chain Risk Edition. The total number of defaults among industrial firms was at a five-year low in 2018, and in 95% of the cases, RapidRatings predicted these potential supply chain disruptions early and accurately.
This year’s study, which rated 284 U.S. industrial firms that defaulted or filed for bankruptcy between 2014 and 2018, showed that suppliers in poor financial health had a greater probability of bankruptcy and poor performance. Financial health is measured by the FHR, an analytic measured numerically from 0-100 representing the overall financial viability of a company.
Of the 37 U.S. industrial firms that defaulted in 2018, 95% had a “High Risk” or “Very High Risk” FHR at the start of the year. In almost all cases, warning signs could be detected in excess of 2 years before the default occurred.
“Even though the industry is at a five-year low in total defaults, the risks and consequences of debt burdens still remain costly,” said James H. Gellert, Chairman & CEO of RapidRatings. “We’re seeing signs of deterioration in defaulters much earlier than in previous years, yet the ability to prop up their finances with easy access to credit has remained undiminished. This capacity to survive for a longer period in a weakened state makes it all the more critical that companies identify and manage the ticking time bombs in their supply chains.”
Notably, all 37 firms that defaulted showed significant debt burdens with three times the amount of leverage (86%) compared to that of non-defaulters (26%). In both 2017 and 2018, defaulters generally maintained cash levels that were less than 15% of their current liabilities. Not surprisingly, these companies also had a lower capacity to pay with an interest coverage of -1.7x compared to non-defaults who posted positive coverage of 2.8x.
With murmurs of a recession on the horizon, low default rates shouldn’t preclude active risk management given the same was also true on the eve of previous two recessions. When the tide turned towards the Financial Crisis, defaults increased by 60%, and then 171% in 2008 and 2009, respectively.
The energy sector suffered the most defaults of any industry vertical over the past five years. Energy and water companies represented 27% of total defaults in 2018, which is more than four times the total default percentage in 2013 (6%).
“Given fluctuating commodities pricing and significant regulatory and environmental challenges, the energy sector has been the industry most vulnerable to market volatility and conditions, accounting for more than one quarter of total defaults in 2018,” added Gellert. “However, as we head into the second half of 2019 and into 2020, retail is another industry to look out for as looming tariffs from trade war tensions continue to impact international trade.”
The retail industry experienced a significant number of defaults despite a strong economy and healthy consumer spending. Whereas retail reported only 5% of total defaults in 2016, the sector saw a surge of defaults in 2017 to 14%, where it has stayed in 2018. Similarly, chemicals and fibers represented 14% of defaults in 2018.
Proactively assessing the financial health of third parties and counter-parties can provide businesses with valuable insights to protect their supply chains and mitigate risk prior to a default event. For more information on RapidRatings’ Financial Health System and the 2019 Annual Default Review, download the full report here.
About the RapidRatings 2019 Annual Default Review
The RapidRatings 2019 Annual Default Review analyzed 284 industrial firms that defaulted or filed for bankruptcy between 2014 and 2018 in the United States. Among the 2018 default cohort, RapidRatings explored current trends in supplier defaults and the typical profile of defaulted companies, including cost of debt and overall financial health based on their FHR at the start of the year.
RapidRatings® sets the standard for financial health transparency between business partners, transforming the way the world’s leading companies manage enterprise and financial risk. RapidRatings provides the most sophisticated analysis of the financial health of public and private companies. The company’s predictive analytics provide insights into how third-party partners, suppliers, vendors, customers and securities issuers are likely to perform. For more information, visit www-2021.rapidratings.com.
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