It’s Been a Cruel, Cruel September For Business Bankruptcy
Public companies have had it pretty rough this month, with a host of big names filing for bankruptcy in quick succession. But this isn’t just a post-summer blip – corporate bankruptcy has been on the increase for a while now and it doesn’t look like it’s abating any time soon. So what exactly is to blame for the rise in public company insolvency?
Breaking records in the worst kind of way
It’s been a record-breaking year – and sadly we’re not talking about the Olympics.
Global debt has never been so high, a result of historically low interest rates. The debt bubble continues to grow, and overleveraged companies are skating on increasingly thin ice. Indeed, the FRISK® Stress Index – which measures the probability of failure across groups of companies – has calculated that the bankruptcy rate in September is 62% higher than the period leading up to the last financial crisis.
And let’s compare to last year. By August, we had already equalled the entire global corporate default tally for the whole of 2015. The only time it’s been higher at the same time of year was in the midst of the credit crunch in 2009. And according to S&P Global Fixed Income Research, companies at the low end of junk status and a negative outlook have hit a 7-year high, with a collective $359 billion in debt.
Public Companies Falling like dominoes
This worrying trend for insolvency has been illustrated over the last few weeks, with public companies tumbling one after the other like a macabre pack of corporate dominoes. Here are just three of note:
Hanjin Shipping: Being the world’s seventh largest shipping company wasn’t enough to protect Hanjin from the mounting pressure affecting the global shipping industry. With a FRISK® score of ‘1’ signalling deteriorating financial health, its bankruptcy filing as the month started came as no surprise for those monitoring counterparty credit risk. To see the warning signs that led to this bankruptcy, read the case study.
Golfsmith: It was a triple bogey for the specialty golf retailer, whose business failure resulted from an overly leveraged growth plan coinciding with a waning popularity in the game. Our proprietary trade payment analysis shows a troubling trend of past due balances and increasing financial risk leading up to Golfsmith’s September bankruptcy filling.
ITT Educational Services: This US-based for-profit college operator tanked in September, when compliance with US Education Department requirements pushed it over the edge into bankruptcy. With a severe liquidity crunch and few financing options, ITT became unable to meet its obligations. ITT’s FRISK® score dropped from ‘3’ to ‘2’ to ‘1’ in the months leading up to the filing, a clear bankruptcy red flag.
The sectors in which these three companies operated couldn’t be more different. And while the energy and resources sectors accounting for a whopping 57% of the total defaults in 2016 to date, the threat of insolvency is present in every industry.
Knowing the warning signs of bankruptcy
With today's global economic volatility and the unprecedented expansion of balance sheets, it’s crucial to keep a close eye on the financial risk of your publicly-traded customers and suppliers.
One way to do so is by creating a targeted ‘watch list’ of higher risk companies in your portfolio, and monitoring these closely for the early warning signs of business bankruptcy.
Another method is to track a reliable financial risk score. For public companies, the FRISK® score reliably predicts the risk of bankruptcy with 96% accuracy within 12 months.
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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.