The New Normal: Managing Chemical Industry Credit Risk Despite Uncertainty
We’re at the 2017 NCCA Annual Educational Conference this week, so we took a look at credit risk in the chemical industry.
Now, the chemical industry isn’t one big monolith — it’s made up of many smaller markets. And, overall, chemicals had a stable year in 2016, and industry analysts are hopeful that 2017 will continue that trend.
But while certain types of companies benefitted from lower oil prices in 2016, and the boom in M&A activity has led to some cost and revenue synergies, there are still some very risky players and outstanding questions that could affect your customers and supply chain counterparties.
The New Normal: Global Uncertainty
A variety of global economic factors will continue to affect certain chemical industry sub-sectors.
- Oil and gas prices are still volatile. For certain chemical sector companies, this price volatility affects their ability to earn a profit.
- Overall global demand for chemicals is very dependent on industrial growth. While a changing U.S. trade and economic policy may provide a domestic tailwind for industrial activity, slower growth in China and the EU may result in stagnating sales and profits.
- Mergers and acquisitions account for much of the industry’s growth. But debt-fueled M&A activity has also created balance sheet stresses and weaker players.
- Bankruptcy risk remains high for selected companies in the industry. For instance, the FRISK® Stress Index for a custom portfolio of 34 chemical companies has increased 203% since 2008 — even surpassing highs from the Great Recession — as shown below.
The gap between strong and weak companies
When looking at specific companies, you can see a wide range of financial risk within the chemical industry, as in any industry.
The FRISK® Stress Index above was created for illustrative purposes, to demonstrate this point.
- The custom portfolio it represents spans 34 chemical industry companies, across sectors as diverse as mining, metals, energy, plastics, pharma, automotive and more. It represents the aggregate measure of bankruptcy risk for the test portfolio as a whole.
- Within this portfolio, there are high-risk companies such as Avon Lifesciences or Momentive Performance Materials (both with a FRISK® bankruptcy risk score of '2') which can easily go undetected among financially stable companies like Bayer AG (with a FRISK® score of '10').
- Momentive Performance Materials, Inc. emerged from a bankruptcy filing in 2014 still carrying $1.17 billion in debt, and shows a continuing level of financial stress that would signal a need for more cautious decisioning. In contrast, well capitalized and diversified companies like Bayer AG have the financial strength to buffer negative events like lower commodity prices or a tough economic environment.
Is Public Company Risk Hiding in Your Portfolio?
Specific company risk never moves in lockstep across an industry, and public companies can file for bankruptcy without much warning.
That’s because for public companies, there’s a pattern of public company financial distress that we see time and time again: corporate financial health can be deteriorating despite seemingly stable payment data.
To be effective at detecting public company risk, it requires both a reliable public company bankruptcy risk score, like the FRISK® score, and an ongoing monitoring process to flag customers that may have trouble paying their bills.
This one-two punch of financial risk management -- predictive analytics and monitoring -- will detect the financially distressed public companies in your portfolio, in good times and bad.
We’re looking forward to seeing you at this week’s NCCA Conference (Exhibit Hall Booth #7), and answering your specific credit risk questions. Stop by!
Free Bankruptcy Checklist to help detect credit risk
As you analyze your portfolio companies, you may want to refer to our Ultimate Checklist to Detect Financial Risk and Business Bankruptcy. This handy resource will help you analyze your financial counterparties, by listing 19 credit risk red flags and bankruptcy warning signs to look for, including:
- Specific financial statement metrics and SEC filing clues
- Telltale financial ratios and trends
- Asset sales and other balance sheet concerns
- Market signs beyond debt rating downgrades
- And much more.
Learn to Detect Financial Risk and Business Bankruptcy.
Download Your Free Business Bankruptcy Risk Checklist
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 $140 billion in trade data on their counterparties every month, giving them visibility into their biggest dollar risks.