What Supply Chain Professionals and Credit Managers Need to Know About the Debt Problem
Credit debt – with interest rates at record lows – is a burgeoning worldwide problem. Will heightened risk hit your customer portfolio this year and if so, how can you get yourself ready for the fallout?
We recently held a webinar, “Dr. Altman on the Mammoth Debt Problem,” with Dr. Edward Altman, inventor of the Z” Score and Max L. Heine Professor of Finance at New York University’s Stern School of Business, and CreditRiskMonitor CEO Jerry Flum, discussing these issues. For a replay and recap of the proceedings, click here.
CreditRiskMonitor’s CEO, Jerry Flum, and Senior Vice President, Peter Roma, sat down with “Manufacturing Talk Radio” hosts Tim Grady and Lew Weiss on their weekly live show to talk about the debt and how it affects supply chain and credit.
Flum and Roma highlighted three main elements to focus on: the reality of today’s debt crisis, how current interest rates contribute to the crisis and what companies can do to mitigate and prepare for potentially catastrophic economic downturn. We explore these points in detail below:
The reality to today’s debt crisis is worse than we think
Flum labels today’s extensive debt load: “the major driver of risk in the world today.”
“Debt is higher than it was in 2007 and 2008,” said Flum, referring to the Great Recession. “In the United States alone, the amount of debt the country holds is three-and-a-half times that of the GDP.”
“’High-yield debt’ is just another word Wall Street coined for junk bonds,” continued Flum. “The problem with such a high percentage of junk bonds is that in normal economic circumstances, 50% of junk bond debt will go bankrupt; but in today’s oversaturated, debt-ridden market, an even higher percentage will result in bankruptcy, leading to economic downturn.”
The driver of this overwhelming amount of debt is low or negative interest rates established by governments across the world.
The unforeseen side effect of low and negative interest rates
In an effort to spark fire under downtrodden economies across borders, government officials agreed to lower interest rates to historic levels. These decisions allowed companies and individuals the ability to borrow money at rates they otherwise wouldn’t qualify for, which fostered a surge in lending.
The result was oversaturation and overcapacity in the marketplace: Companies which would otherwise not be in business found new or extended life. Public companies specifically – because they have the financial data to leverage – borrowed more than they can ever afford to pay back, which industry experts like Flum and Roma predict will eventually lead to default and bankruptcy.
Should demand contract, companies in oversaturated markets will cut prices to weed out the competition, which results in a less profitable industry overall. The challenge in 2017 and 2018 revolves around what credit and procurement professionals can do to safeguard their establishments.
How procurement and credit professionals can protect themselves
Flum and Roma offer a concrete, actionable way those that do business with debt-laden public companies can mitigate risk and reduce the possibility of default: cultivate awareness. For procurement and credit management professionals, awareness is the first step, which lays the foundation for action.
“You want to ask yourself: “How many companies am I doing business with that have high levels of debt and junk-rated debt on their balance sheet?’” said Roma.
Fewer supply chain professionals or credit managers know how much of their business is coming from the public realm. “Public companies are buying and selling companies every day, every week, and it’s so hard to stay on top of that,” said Flum. “We analyze trade receivable data we get from our subscriber base, and we find that roughly 40-to-50% of the revenue that these people sell are to public companies.”
This awareness is a necessity many credit professionals don’t have, not because they don’t take it seriously, but because the ever-changing information surrounding public companies is nearly impossible to keep up with using only manpower.
Flum and Roma agree that now isn’t the time to flee and take cover, but instead, now is the time for action. Procurement and credit professionals can take action now, and mitigate risk in the future. “Better to be too early than too late,” said Roma.
“We’re not telling people to get out of business and sell everything they own,” added Flum. “What we’re saying is, take some steps that will allow you to survive, because the guys who survive all of this are going to have a wonderful future in front of them.”
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.