Get Ahead of 2016’s Worsening Financial Risk: 5 Strategies for Credit Pros
The world is getting worse every day for economic and credit risk. The trends are sobering. According to S&P Global Ratings:
- The U.S. Speculative Corporate Default Rate topped 4.1%, and is expected to rise to 5.3% by March of 2017. It hasn’t been this high since September 2010.
- There have been 87 global corporate defaults so far in 2016. The global tally hasn't been this high at this point of the year since 2009. 36 of these were from Oil & Gas, the rest from various sectors.
- Credit downgrades outpace upgrades by a margin of more than 2:1. This ratio has risen steadily as financial conditions deteriorate.
What’s your game plan for dealing with the volatile environment?
Our Mid-2016 Credit Risk Report examines the latest default trends and bankruptcy data, and provides recommendations for dealing with financial risk, to help your company avoid being blindsided by the economic turbulence ahead. Here are five strategies to get you started:
1. Identify “hidden” high risk public companies.
Public company failure can take you off guard -- and it’s more likely today than even during the financial crisis of 2008. Though you may have fewer public companies in your portfolio, they usually represent a large share of dollar risk.
For public companies, impeccable payment histories can mask growing financial stress, and potential failure is often hidden. What’s more, in bad times the risk of a big public firm failing is actually many times greater, compared to small private companies. (Learn more)
With mounting credit cycle concerns, it’s essential to accurately assess the threats posed by high-risk public companies in your portfolio.
2. Discover the actionable data in your own receivables.
Your company’s trade receivables data is a rich resource for managing risk, especially if you contribute that data to a trade group or credit monitoring agency that can pair it with predictive financial risk data about your customers. High-performing credit departments leverage trade data to analyze portfolio risk, and identify high-risk accounts that require special attention.
3. Know and watch for the early warning signals of financial stress.
Bankruptcy doesn’t happen overnight, but the early signs are there if you know where to look.
Go beyond financial ratios -- keep an eye on large drops in market capitalization, debt refinancing and restructuring activity, credit agency downgrades, MD&A warnings and more. All of these provide clues to deteriorating financial conditions. Read more on the early warning signs of increasing financial stress, to avoid expensive surprises.
4. Develop valuable partnerships across your organization.
By working closely with counterparts in procurement and sales, you can proactively reduce risk across your organization.
For instance, credit and procurement can team up, to identify vendor financial risks early in the sourcing process, and periodically reassess key suppliers to diagnose increasing financially stress that might impact your business. Credit and sales can work together more closely too, to pre-vet prospects and identify profitable sales opportunities. Manage risk by developing these valuable partnerships.
5. Tighten up your risk management procedures
Credit analysis and risk management is labor intensive. By streamlining internal processes, and making better use of data and tools to free up time for analysis, you can create more value for your company.
A predictive financial risk score like the FRISK® score, when combined with timely alerts, provides the advance warning you need to evaluate—and if necessary, reassess—business relationships with customers and suppliers, based on demonstrated risk levels.
Are you ready for the risks ahead?
Learn what the latest trend data says and how to reduce financial risk. Read our Mid-2016 Credit Risk Report
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.