Rapid Ratings Blog

2016 RapidRatings Half-Year Default Study

Posted by Rapid Ratings on August 05, 2016

Financial Health paints a telling picture of potential defaults

The RapidRatings Half-Year Default Study examines default information from all public, non-financial U.S. companies in coverage, looking specifically at their Financial Health Rating (FHR®) at the time of and leading up to default. What we found at the mid-way point this year is worth a closer look.

At this time last year, 30 of the U.S. public companies had filed for bankruptcy, leading to an eventual 58 defaults in 2015. This year, however, there have already been 45 defaults, on track for a total of 90 and far surpassing what we saw last year. For a closer look at the 2015 defaults, download the RapidRatings Industrial Default 5 Year Review: 2011 to 2015. 

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Understanding the warning signs of default

RapidRatings rates 98% of the U.S. public company universe. Companies with a Financial Health Rating (FHR) less than 40 are considered High Risk, meaning their probability of default within 12 months is larger than most. Going into 2015, the percentage of U.S. public companies rated High Risk or Very High Risk was 13.8%, however, by the start of 2016 this number had risen to 16.4% of the rated universe, which was the highest percentage of coverage to be rated High Risk in more than 5 years. Unfortunately, the current percentage of the universe which is High Risk has risen to 19.8% since the start of the year. Want to be notified when a company files for bankruptcy? Subscribe to our Bankruptcy Alerts for timely notifications and an overview of the FHR trend leading up to default.Percentage_of_High_Risk_Companies_and_Half_Year_Default_Frequency.png

Expanding the Conversation

Along with public companies, RapidRatings also rates private companies confidentially for our clients on the same scale, based on a comprehensive analysis of a firm’s financial statements.  Read more about our private company ratings and our Private Company, Financial Statement Sourcing on our website.

In comparison to the U.S. public companies we observed, the private companies in the U.S. that we rate have managed to sustain themselves better. While debt to total assets is at a comparable level to public companies (31%), working capital is significantly better, with a current average WC/TA ratio of 25%.

Between the start of 2015 and 2016 U.S. public companies increased their debt levels relative to total assets from 27% to 34%. At the same time working capital to total assets decreased sharply, from 25% to 8%, and cash from operations to current liabilities decreased from 46% to 36%. While our metrics view over 70 ratios on an industry specific basis in the formation of an FHR, each of these ratios are representative of the strain felt by these companies due to broader economic stress. 

Findings from 2016 Half-Year Default Study

  • The percentage of high or very high risk companies rose from 13.8% going into 2015 to 16.4% going into 2016.
  • Between 2015 and 2016 companies increased their debt levels relative to total assets from 27% to 34% while cash from operations to current liabilities decreased from 46% to 36%.
  • Overall, private companies in coverage in the US have managed to sustain themselves better than public companies

Topics: Bankruptcies & Default Studies