Distance to default: a default indicator for Australian-listed companies Vol.3

Distance to default: Volume 3

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

Aerial view of yacht sailing in the ocean

The third edition of KPMG’s bi-annual Distance to default publication focuses on the changing state of corporate health across all ASX sectors for the 6 months to December 2017.

In the report we dive into the largest movers by industry sectors, and analyse the proportion of companies consistently displaying low Distance to Default (D2D) scores (otherwise known as ‘D2D Zombies’). We also provide commentary regarding legislative changes to Ipso facto clauses that will impact all companies that enter into or amend contracts after 1 July 2018. These changes are relevant for companies managing their supply chain risk and distressed companies evaluating strategic options available to them in any restructure.

Key findings for the 6 months to December 2017

  • The ASX average D2D score was stable from June 2017 to December 2017 (moving from 1.96 to 1.97), however there was significant underlying change in the scores of the companies making up this analysis, with:
    • 50 percent of the companies analysed displaying an improved D2D score
    • 46 percent of companies showing a decline in D2D score
    • the remaining 4 percent with no movement or newly listed.
  • Real Estate continues to be a strong performing sector (highest D2D score) and also displayed the greatest improvement in D2D score (increase by 8.9 percent), while Utilities had the largest decline (decrease by 9.2 percent).
  • Zombies make up 20 percent of ASX companies analysed, with 1 in 5 companies displaying a D2D score below 1 for three or more half periods.
  • 62.2 percent of companies displaying a D2D score above 3.0 (furthest from default) were in the financials, real estate, and consumer discretionary sectors.
  • 74.3 percent of companies with a D2D score below 1.0 (closest to default) were in the Materials, Energy, and Information Technology sectors.

We hope you find this third edition of KPMG Restructuring Services’ Distance to default publication useful in providing meaningful trends in corporate health across the ASX.

KPMG Financial Performance Index

KPMG Australia acknowledges the Traditional Custodians of the land on which we operate, live and gather as employees, and recognise their continuing connection to land, water and community. We pay respect to Elders past, present and emerging.

©2023 KPMG, an Australian partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organisation.

Liability limited by a scheme approved under Professional Standards Legislation.

For more detail about the structure of the KPMG global organisation please visit https://kpmg.com/governance.

Connect with us

Save, Curate and Share

Save what resonates, curate a library of information, and share content with your network of contacts.