For Credit Risk Monitoring, Early Warnings Are Vital
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
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 $150 billion in trade data on their counterparties every month, giving them visibility into their biggest dollar risks.