COVID-19 Stress Test Analysis

Posted by James H. Gellert on April 01, 2020
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RapidRatings has conducted a stress test to aid our clients in modeling extreme potential outcomes of the COVID-19 crisis on their portfolios of public and private third parties, suppliers, borrowers, and other counterparties. 

In our COVID-19 Resource Center, we’ve provided a variety of COVID-19 related analyses.  One piece delves into the differences in US private companies and Chinese privates to understand the resiliency of these entities through and post-crisis.  We’ve also provided a survey containing primary source perspectives from private companies around the world.  They reflect on how the crisis is affecting them, how long they can ship product and service clients in the face of full or partial business shutdown as well as many other insights.  In another, we explain the differences in inventory levels of companies around the globe and the resulting strengths and weaknesses in this current crisis with its far-reaching supply chain implications.   

The RapidRatings Core Health Score (“CHS”) and Financial Health Rating (“FHR”) are the most sophisticated analytics on financial well being of global public and private companies.  These ratings are designed to identify strong from weak companies and those that are better able to withstand idiosyncratic or systemic shocks.  Leading into the crisis, low rated (higher risk) companies will be the most strained and least able to survive.  The high rated (lower risk) companies are much better positioned to withstand this market shock and to rebound as we work through the current market conditions and unknown duration of the crisis. 

The CHS and FHRs together provide long-term and short-term insights into companies’ strengths and weaknesses.  Our entirely algorithmic process analyzes financial statements of public and private companies from 140 countries and through 24 integrated industry models.  The system first produces the CHS, a 2-3 year forward-looking assessment of a company’s efficiency and ability to remain competitive with global peers.  The FHR System then evaluates the company’s liquidity, leveraging and earnings performance to determine the resilience characteristics to arrive at the FHR, an assessment of the company’s 1-year likelihood of default[1]

In addition to the inherent, forward-looking nature of the scores, RapidRatings conducted a multi-faceted stress test to provide guidance on how our global coverage might react post-crisis.  This scenario analysis initially stresses all companies from a bottom-up perspective and then overlays macro factors to assess how companies will fare from business disruption and deterioration and then be affected by  macro-economic factors.  In doing, we’re providing idiosyncratic and systemic stress to our total coverage.

The methodology, results, and outlooks can be found by downloading the full stress test report below. 

Download Report

[1] The Core Health Score (CHS) combines 62 carefully selected financial ratios in an econometric model that differentiates exceptionally well between weak and strong firms in assessing efficiency and competitiveness over the next 2-3 years. It runs on a scale of 0/worst to 100/best. The 62 ratios are allocated as follows: (a) Operating Profitability (11 ratios); (b) Net Profitability (12 ratios); (c) Cost Structure Efficiency (18 ratios); (d) Capital Structure Efficiency (11 ratios); and Other Ratios (10 ratios, largely measuring liquidity).  

  • The Financial Health Rating (FHR®) is composed of the CHS and its interactions with 11 Resilience Indicators in a probabilistic statistical classification model that produces an estimate of the Probability of Default over 12 months. The FHR likewise runs on a scale of 0/worst to 100/best.
  • The Core Health Score explains 88% of the default-prediction accuracy level achieved by the FHR Model, while the 11 Resilience Indicators are the source of 11%, with the remaining 1% accounted for by an industry adjustment. 

The CHS score for each firm is based on our global database covering more than a dozen countries and incorporates data starting as early as 1971 (depending on the country) encompassing more than 10 million corporate financial records for listed and unlisted firms. We built 24 global industry models based on this data which is updated regularly. 

Topics: Supplier Risk Management, COVID-19, inventory