Bracing for A Credit Storm: 6 Ways to Manage Risk and Avoid Loss
Managing risk in today’s financial environment is no easy task.
Debt is at record levels. According to S&P Global Fixed Income Research, the global corporate default tally so far in 2016 reached 100 companies, more than 50% higher than the count at this time in 2015. The risk of bankruptcy among public U.S companies is currently 81% higher than before the last financial crisis. And in highly distressed industries such as U.S. oil and gas extraction, nearly a third of U.S. companies are showing extreme financial distress.
The good news is that credit risk is predictable and navigable, with the right financial information and monitoring processes in place. Here are six strategies to detect growing risk:
1. Know the early warning signs of financial stress.
A telltale pattern of financial risk characterizes most troubled public companies. Here are a few of the common red flags that often signal increasing bankruptcy risk:
- Bottom-quartile of peers on most key financial ratios
- A FRISK® score deep in the ‘red zone’
- Foreboding company financials quarter after quarter
- Troubled stock performance, with share prices often dropping sharply
- Reclassification of outstanding debt as short-term, after violation of long-term debt covenants, and many more
- To learn what other signals to watch for as you monitor your credit portfolio, read the complete article on bankruptcy red flags.
2. Invest in predictive analytics.
With the right tools to predict business failure, we are much less likely to be blindsided by it. For instance, the FRISK® financial risk score predicts public company bankruptcy within 12 months, with 96% accuracy. With a reliable predictive metric, you can identify high risk companies sooner, and make better financial decisions.
3. Don’t be lulled into a false sense of security based on payment patterns.
One of the most common misperceptions among credit professionals is that payment history always signals financial distress. While payment patterns help to assess private company credit risk, they’re not a true indicator for public companies. To learn why, read the infographic: 5 Myths About Risk in Public Companies.
4. Consider a broad cross-section of financial risk factors.
To keep from being blindsided and protect your company from loss, it’s important to consider a wide variety of financial ratios and stress indicators in your assessments. Consider diverse factors from multiple sources, such as market capitalization, bond ratings, credit manager behavioral analytics, various ratios from financial statements, the Altman Z-Score, and more, to create a more complete picture of risk for your critical suppliers and customers.
5. Pay attention to debt-maturity schedules.
Financially distressed companies often fail when they are unable to refinance as debt comes due. It may take some digging, but the refinancing calendar is another clue to understanding when insufficient cash and refinancing difficulties will trigger a crisis and cause a company to fail.
6. Don’t underestimate potential pockets of business opportunity.
With so much bad news in some industries, it’s easy to forget that there are many resilient companies. Especially in troubled industries, it's also important to have a process to identify companies with healthy balance sheets, low debt, strong liquidity, and the ability to ride out current trends. These represent important pockets of opportunity.
Which companies will dig their way out, and which will fail? For help detecting public company risks in your credit portfolio, contact us for a free portfolio risk analysis
CreditRiskMonitor is a financial news and analysis service designed to help professionals stay ahead of public company risk quickly, accurately and cost-effectively. More than 35% of the Fortune 1000, plus thousands more worldwide, rely on our commercial credit reporting and predictive risk analytics for assessing the financial stability of more than 56,000 global public companies.
At the core of CreditRiskMonitor’s service is its 96%-accurate FRISK® score, which is formulated to predict public company bankruptcy risk. One of four key components calculated in the FRISK® score is crowdsourced subscriber activity. This unique system tracks subscribers' patterns of research activity, capturing and aggregating the real-time concerns of what are essentially the key gatekeepers of corporate credit. Other features of CreditRiskMonitor’s service include timely news alerts, the Altman Z”-Score, agency ratings, financial ratios and trends. CreditRiskMonitor’s network of trade contributors provides more than $140 billion in trade data on their counterparties every month, giving them visibility into their biggest dollar risks.