Distance to Default: A default indicator for Australian-listed companies Vol 10 Distance to Default: A default indicator for Australian-listed companies Vol 10 Distance to Default: A default indicator for Australian-listed companies Vol 10

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 the Materials and Energy sectors displaying the lowest D2D scores. We have also seen strong growth in the Information Technology sectors which we highlight below.

• The latest D2D score of 1.95 is not only better than pre-pandemic levels (1.88 at December 2019) but also the strongest D2D score since 2018.
• The market continues to remain buoyant with strong M&A and deal activity and record low insolvency appointments (c.40 percent lower on average compared to pre-pandemic). And these lower than average insolvency levels are despite corporates having been weaned off government stimulus in recent months. There have been a number of key drivers supporting the recovery in the market:
  • low interest rates
  • resilient consumer spending
  • stakeholder support and debt negotiation (Australian Taxation Office, lenders, landlords)
  • access to debt and capital.
• Looking to 2022, whilst there remains continued expectations of strong M&A and deal activity, there are a number of factors which may impact corporate health:
  • an election to be held before the end of May 2022, and absence of clarity on possible details on spending or tax changes
  • ongoing supply chain bottlenecks and pressure, particularly in certain sectors such as Automotive due to the short supply in semi-conductors
  • inflation and pressures around potential interest rate rises
  • pressure on labour supply and migration skilled and core services workers
  • continued risk of vaccine resilient strains of COVID-19 and ongoing impact of 'quasi lockdowns' particularly on hospitality, retail, non-essential health and logistics among others
  • global uncertainty and geo-political tensions particularly across the global superpowers.

COVID-19 has been a driver of digital transformation

• This issue we highlight the increase in D2D score for the Information Technologies sector, being the largest increase of any sector compared to pre-COVID (1.31 in December 2019 to 1.59 in October 2021 – 21 percent increase).
• Pre-COVID, many businesses were travelling at varying speeds on a journey towards a digital business model. The scale of the pandemic has forced an acceleration, both in the speed of change and the required investment in digital transformation.
• Not only is digital agility now an operational necessity for organisations to refocus priorities and adapt quickly, but how they do that matters. Many organisations are already building environmental, social and corporate governance (ESG) metrics into business cases.
• According to KPMG’s 2020 global survey, organisations are investing heavily in technology to address immediate concerns like falling revenue and interrupted supply chains, and to build longer term competitiveness and resilience. Seven out of 10 digital leaders in the survey report that their digital transformation efforts have put them months, or even years, ahead of where they expected to be pre-pandemic.

The Distance to Default metric is an indicator of financial health and is used to assess a company’s ‘distance-to-default.’ The analysis has been prepared using the Moody’s Kealhofer, McQuown and Vasicek (KMV) D2D formula, and relies on source data from the Capital IQ database.

The metric takes into account financial information and market data. The closer to zero, the more likely a company is to default. In contrast, the further a company is from zero, the less likely it is to default. In this analysis, released every 6 months, we analyse the D2D score movements of ASX-listed companies (following the reporting season of full year and half-year results) to draw insights into corporate health across the Australian economy.

Read our analysis of the D2D score movements of ASX-listed companies.

Please contact us if you would like us to present our insights to your team.