For Credit Risk Monitoring, Early Warnings Are Vital

By CreditRiskMonitor

Recent headlines would have you believe that oil and gas industry financial distress is all but history. Not so! There are still plenty of high-risk energy companies out there.

Today, we share a post-bankruptcy analysis of Stone Energy Corporation. It's a great example of the early warning signs that often accompany growing financial distress.

Read on, to learn to spot credit risk in your portfolio early, and come out ahead. As the saying goes, ‘time is money'! 

Stone Energy Corp.: What went wrong?

Stone Energy Corp. filed for Chapter 11 bankruptcy protection last month, unable to ride out the combination of low commodity prices and a heavy debt load. Earlier this week, we profiled three other recent energy industry bankruptcy filings.

While the energy industry will eventually bounce back, there are still distressed industry participants that need to shed debt and get their balance sheets in order. More will inevitablty fail.

Protecting unsecured claims in a restructuring plan can be time-consuming and costly. That's why it's always better to spot risk early, when there's stil time to reduce your exposure.

In the case of Stone Energy, deteriorating financial health was easy to spot. The pattern of red flags included:  

  • In January 2016, eleven months before filing, the FRISK® score fell from a ‘2’ to a ‘1’, indicating bankruptcy risk of up to 50% within the next year
  • In the March 2016 MD&A, management disclosed a borrowing deficiency and challenges complying with debt covenants
  • In May, the company missed an interest payment; several rating agencies issued credit downgrades, and the NYSE warned of delisting
  • For more than a year before filing, the driller’s financial statements revealed sequential quarters of poor financial performance and declining metrics, such as: net losses, negative margins, declining cash flow and working capital, leverage and liquidity ratios, and negative rates of return
  • The share price declined sharply in July; in August; the company sold assets and proposed restructuring.

To see the complete timeline leading up to the bankruptcy filing, read the Stone Energy Corp. case study.

For Better Credit Risk Monitoring, Timing is Everything

If you take nothing else away from our series of bankruptcy post-mortems, we hope it’s this: there are ways to detect credit risk in your portfolio early, before bankruptcy occurs.

To do this, you need a risk metric that’s both reliable and timely. For instance, Stone Energy’s payment history (DBT) didn’t provide any warning at all. (For public companies, that’s often true). Alternatively, the Altman-Z score was way too early. Without the right combination of risk analytics and monitoring, your portfolio may be more exposed than you think.

That’s why a reliable financial risk score plus an automated credit monitoring service is key. A predictive risk score tells you when risk changes for your portfolio companies, and ongoing monitoring alerts you to growing financial distress.

Learn how to spot credit risk in time: Download the Stone Energy bankruptcy case study