November 2016 Business Credit Risk: Like Black Ice
Along with grayer skies and cooler weather, as November draws to a close we note some welcome economic bright spots, and a few fresh concerns.
In the last two weeks since the election, stocks rebounded, interest rates crept up, and the U.S. dollar rallied. Markets are anticipating a wide range of GDP-friendly policies, from lower corporate taxes to an increase in spending on infrastructure.
November 2016 Economic Trends: Positive, With Patches of ‘Black Ice’
There are a few fresh clues as to where we are in the business cycle, beginning with these positive signs:
- The Conference Board Leading Economic Index (LEI), which includes ten distinct economic components, such as consumer sentiment, employment and manufacturing figures, and other indicators, was up marginally in both September and October, 2016.
- The Moody’s Liquidity Stress Index dropped for a 7th month in a row, according to the NACM blog, stemming from improved access to the credit markets.
- Another index from Moody’s, the Covenant Stress Index, dropped for a 6th month in a row, indicating that speculative-grade companies remain at low levels of violating their debt covenants (in the aggregate).
Unfortunately, there are some economic red flags that counterbalance the “Trump Bump” and other recent economic trends:
- According to the FRISK® Stress Index, U.S. public company bankruptcy risk is +63% higher than it was before the last Financial Crisis.
- November bankruptcy filings continue apace, including: paper producer Catalyst Paper Corp., sports equipment manufacturer Performance Sports Group, Ltd., aviation company Erickson, Inc., struggling retailers American Apparel and NastyGal, tech firm Xtera Communications, and oil and gas producer Sable Natural Resources.
- According to Moody’s, speculative-grade liquidity rating downgrades outnumbered upgrades by a ratio of 7:3 so far in November, across multiple industries -- not just the energy sector.
- Uncertainty about international trade deals and politics have rocked markets and renewed global trade concerns. For instance, the Credit Managers’ Index (CMI), a key manufacturing indicator put out by Europe’s largest credit professional body (CICM) raises fresh concerns about the European business outlook. And, despite a more stable regional economic outlook for Asia, high Chinese corporate financial leverage remains a concern.
- The odds of a U.S. interest rate hike in the near future approaches 100%, raising fresh balance sheet concerns for highly leveraged companies with refinancing needs.
Business Credit Risk: Hard To Spot, But Still Quite Dangerous
Economic indicators and industry averages can be misleading. As the saying goes, “your mileage may vary” -- and like black ice on winter surfaces, some business credit risks are more difficult to see.
To truly manage your risk, ongoing due diligence is essential.
- Monitor each customer, supplier, and business partner closely.
- Use technology to your advantage, including a reliable financial risk score, news alerts on portfolio companies, and a free tool to provide insights into your own trade files to manage portfolio risk.
- Develop a watertight risk management process to detect companies that appear healthy on the surface, despite underlying financial signals of dangerously thin ice.
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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.