Distance to default: a default indicator for Australian-listed companies Vol.4

Distance to default: Volume 4

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 top of mountain illuminating the night sky with a blue light

The fourth 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 June 2018.

In this 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 analysis and commentary on the potential opportunities and headwinds in the Australian construction sector.

Key findings for the 6 months to June 2018:

  • The ASX average D2D score increased from December 2017 to June 2018 (moving from 1.97 to 1.98), with significant underlying change in the scores of the companies making up this analysis.
  • Around 49 percent of the companies analysed displayed an improved D2D score, with the remaining companies showing a decline or no change in D2D score.
  • Real Estate continues to be a strong performing sector (highest D2D score), but displayed a decline in D2D score (decrease by 5.2 percent), while Telecommunication Services recorded the largest deterioration in D2D score (decline by 20.7 percent).
  • 364 ‘Zombie’ companies displaying a score below 1 for three or more half year periods on the ASX representing 18.7 percent of total companies analysed.
  • 63.8 percent of companies displaying a D2D score above 3.0 (furthest from default) were in financials, real estate, and consumer discretionary.
  • 72.5 percent of companies with a D2D score below 1.0 were in Materials, Energy, and Information Technology.

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

KPMG Financial Performance Index

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