Distance to Default: A default indicator for Australian-listed companies Vol.6

Distance to default: Volume 6

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

Changing state of distant lava flowing into wild ocean

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 sixth edition of KPMG’s bi-annual Distance to Default publication comments on the changing state of corporate health across all ASX sectors following the end of the reporting season for the six months to June 2019.

Consistent with our last report, our analysis indicates that the Financials and Real Estate sectors continue to display the highest D2D scores (furthest from default), with Energy and Materials sectors displaying the lowest D2D scores, many of which continue to appear on our Zombies list most at risk of default due to the companies' persistent proximity to the default line (D2D score of 0). 

Overall, the ASX average D2D score increased from December 2018 to June 2019 (moving from 1.72 to 1.75). Despite a small boost to the share market from our last publication, half of the sectors analysed experienced a decline in their D2D score. With the falling Australian dollar and political uncertainty over the China/US trade war and the UK Brexit we expect these global headwinds to continue to impact the landscape of Australian business and global competitiveness, impacting their D2D scores moving forward.

Key findings for the 6 months to June 2019

  • The ASX average D2D score increased from December 2018 to June 2019 (moving from 1.72 to 1.75), with significant underlying change in the scores of the companies making up this analysis.
  • Only 46 percent of the companies analysed displayed an improved D2D score, with the remaining companies showing a decline or no change in D2D score.
  • Financials and Real Estate sectors were the strongest performing sectors (highest D2D score). However, the Real Estate sector displayed the largest decline in D2D scores (decrease of 8.7 percent), whereas the Financials sector improved by 8.6 percent.
  • The five industry groups with significant D2D score declines were:
    • Technology Hardware and Equipment – decline of (14.3 percent) to 1.12.
    • Real Estate – decline of (8.7 percent) to 3.38.
    • Commercial and Professional Services – decline of (7.8 percent) to 1.68.
    • Telecommunication Services – decline of (6.0 percent) to 1.50.
    • Utilities – decline of (5.8 percent) to 2.22.
  • 394 ‘Zombie’ companies displaying a score below 1 for three or more half year periods on the ASX representing 21 percent of the total companies analysed.
  • 68.9 percent of companies displaying a D2D score above 3.00 (furthest from default) were in the Financials (123 companies), Real Estate (46 companies) and Consumer Discretionary sectors (37 companies).
  • 68.7 percent of companies closest to default (less than 1.00) were in the Materials (344 companies), Energy sector (87 companies) and Information Technology sector (84 companies).

We hope you find this sixth 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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