Distance to default: a default indicator for Australian-listed companies Vol.5

Distance to default: Volume 5

The Distance to Default (D2D) score serves as a useful metric for benchmarking company performance across different industries, irrespective of company size.

Gayle Dickerson

Partner, Restructuring Services

KPMG Australia

Person standing in Antelope Canyon

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.

The fifth 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 2018. In this report we dive into the largest movers by industry sectors, and analyse the proportion of companies consistently displaying low D2D scores (otherwise known as ‘D2D Zombies’). We also take a look at the financial services sector and provide some high level commentary on the major findings, recommendations and future outlook of the sector in light of the recent Banking and Financial Services Royal Commission. The sector is experiencing a period of adjustment as it seeks to rebuild trust and restore investor confidence.

Key findings for the 6 months to December 2018

  • The ASX average D2D score decreased from June 2018 to December 2018 (moving from 1.​98 to 1.​72), with significant underlying change in the scores of the companies making up this analysis.
  • Only 29 percent of the companies analysed displayed an improved D2D score, with the remaining companies showing a decline or no change in D2D score.
  • The Real Estate and Financial Services sectors continue to be the strongest performing sectors (highest D2D score), but displayed a decline in D2D score (decrease of 13.​2 percent and 12.​8 percent respectively while the Consumer Discretionary recorded the largest deterioration in D2D score (decline by 23.​6 percent).
  • 372 ‘Zombie’ companies displaying a score below 1 for three or more half year periods on the ASX representing 19.​9 percent of total companies analysed.
  • 61 percent of companies displaying a D2D score above 3.​0 (furthest from default) were in financials, real estate, and consumer discretionary.
  • 69.​6 percent of companies with a D2D score below 1.​0 were in Materials, Energy, and Information Technology.

We hope you find this fifth 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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