Credit Risk Outlook: Troubled Sectors to Watch in 2017
Bankruptcy forecasts are handy. They help us understand when things are improving, and warn us when things are getting worse.
But statistical averages can also be misleading. After all, like the weather forecast -- a 20% chance of rain is really either 0% or 100%, depending on where you are.
Business bankruptcy forecasts are like that too. Overall, average bankruptcy risk may be falling, but your credit portfolio risk is what really counts.
Let’s review the bankruptcy outlook for 2017 — and consider a strategy to reduce your counterparty risk exposure, no matter what happens in the year ahead.
2016 Business Bankruptcy Recap: A Rough Year
Let’s start with a look back.
- According to Bankruptcy Data, public bankruptcies rose more than 25% last year, on top of a 46% rise the prior year.
- Of 2016’s public company filings, 25 had assets greater than $1Billion, compared to 19 companies of that size in all of 2015.
- Finally, as the chart below shows, 41% of 2016’s bankruptcies were focused in the energy and mining sectors. (Source: Seeking Alpha).
2017 Bankruptcy Risk Shifts: Sector Rotation
A somewhat different bankruptcy picture is likely to emerge in 2017. We project a reduction to overall credit risk, plus some new troubled sectors to keep your eye on. In other words, a sector rotation -- some sectors will strengthen, others will get riskier.
- Bankruptcy in the energy industry is expected to begin to stabilize. While there is still plenty of industry financial distress (three more energy-related companies have filed or announced plans to file for bankruptcy in January to date), financial distress will run it's course in oil and gas while other industries are expected become increasingly distressed.
- More bricks-and-mortar retail companies are expected to succumb to secular pressures, especially the most highly leveraged, as buying behavior continues to grow online. Store closures have already been announced for Sears, Macy's and The Limited, and more retail bankruptcy filings are expected in the first quarter.
- The healthcare and pharma sectors may find profits squeezed, as the ACA is dismantled and these industries enter the political crosshairs of a new Trump Administration.
- Utilities and specific commodities like coal will likely also be under growing pressure, as natural gas and renewables oust coal as a primary energy source in the U.S.
- Despite growing sector risks, overall public company bankruptcy risk appears to be moderating; the U.S. FRISK® Stress Index – an aggregate measure of bankruptcy risk across all industries – has fallen to +35% currently, down sharply compared to last year at this time, seen on the chart below.
The Trouble With Credit Risk Averages
The trouble with national credit risk trends and industry averages is that they tell you nothing about the actual counterparty risks you face.
We’re reminded of Harry Truman’s famous quote: 'It's a recession when your neighbor loses his job; it's a depression when you lose your own.'
So while total U.S. bankruptcy risk may be 35% higher than before the last financial crisis, your portfolio credit risk exposure may be half that. Or double!
At the end of the day, the only way to truly stay ahead of bankruptcy risk is to monitor your specific counterparties.
Strategies to Manage Your Credit Risk Exposure
For better outcomes in 2017, make sure your credit risk monitoring process is watertight. Accurate insights, plus early warnings, will keep risks in check.
In practice, that means using a reliable financial risk score, in combination with a portfolio credit risk monitoring service. This will help you identify your ‘at-risk’ customers in time to take appropriate action, no matter what the year ahead brings.
Your credit management peers say it best:
“ … Your portfolio risk history highlighted that one of our customers was "at risk," causing us to reduce our exposure. We knew there were issues, but CreditRiskMonitor demonstrated the degree to which we were at risk”.
“… I have found CreditRiskMonitor to be an invaluable asset. The FRISK® score is extremely reliable, and, the continuous monitoring & email alerts help us remain proactive in managing risk”.
“… Because we received timely information and updates, we placed a large company on credit hold long before they filed bankruptcy. Had we not used this service, we would've continued to releases orders without realizing the risk”.
Need help figuring out your company’s exposure to public company risk?
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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 over 58,000 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 $135 billion in trade data on their counterparties every month, giving them visibility into their biggest dollar risks.