Distance to default: a default indicator for Australian-listed companies Vol.2

Distance to default: Volume 2

Default risk (or insolvency) is the uncertainty surrounding a company’s ability to service its debt as and when it falls due. Prior to default, there is no way to discriminate unambiguously between companies that will default and those that will not. At best, we can only make probabilistic assessments of the likelihood of default. By applying a turnaround practitioner’s lens, KPMG provide key insights to inform clients of sector default risk.

Gayle Dickerson

Partner, Restructuring Services

KPMG Australia

Man on a cliff edge looking out to misty valley

The second edition of KPMG’s biannual report continues to gauge if an industry has moved either closer or further away from the default line. Our investigation brings together analysis from information available for the majority of Australia’s ASX listed companies and adopts the Distance-to-Default (D2D) measure used by the Reserve Bank of Australia, in order to provide meaningful insights into the trends in corporate health and suggestions on remedial action for distressed sectors.

Any business heavily exposed to a particular sector will have a vested interest in tracking the potential for corporate default with stakeholders important to their business. Understanding these trends can help organisations make informed decisions, and reduce their risk when dealing with companies in a sector experiencing declining or weak corporate health. Trends in declining corporate health for certain sectors can trigger episodes of systemic instability and have adverse impacts on lenders, counterparties and investors.

FY17 D2D key findings

  • Improved corporate health across the ASX despite geopolitical uncertainty, a weakening Real Estate Management and Development industry and a widening disparity between the haves and have nots in the Retail sector.
  • The Financial and Real Estate sectors continue to display the highest D2D scores and the Energy sector continues to have the lowest D2D score.
  • Of the total ASX, we classify 437 companies as Zombie companies which between them hold $11.1 billion in stranded capital ready to be restructured. Whilst this amount is a small percentage of the overall ASX market capitalisation, our CEO survey supports the fact that restructuring of balance sheets will become the norm over the next 3 years.
  • Widening disparity between the ‘have and have nots’ in the Retail and Consumer Markets sector in terms of D2D performance. The average D2D score for Retail and Consumer Markets companies declined over the 6 months from December 2016 to June 2017, with over half of them displaying D2D scores below the ASX average score. Pressure is evident across Distributors and Specialty Retail.
  • Restructuring is likely to become the new norm over the next 3 years – whether companies are in distress or not.
  • Safe to fail: we touch on the new safe harbour legislation which is relevant for distressed companies or those slipping into the ‘grey zone’ of questionable solvency. The introduction of the Safe Harbour laws provide a welcome opportunity for honest Directors to be safe to fail and seek a better outcome for the company and its creditors.

In this edition, we take a deep dive look at the much speculated upon Retail and Consumer Markets sector identifying five key trends, and areas of focus for retailers, for 2018.

KPMG Financial Performance Index

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