Business risk downgrades on the rise

D&B's latest Corporate Health Watch reveals more businesses suffered a risk downgrade in the March quarter than during the GFC

June 23, 2011

Rising payment terms and a softer outlook for profits have seen an increasing number of businesses suffer a risk downgrade over the March quarter, according to new figures.

Dun & Bradstreet’s latest Corporate Health Watch reveals more than 145,000 businesses experienced a risk downgrade, up 75 percent from the same time last year.

This result is nearly 125 percent higher than the number of downgrades which occurred during the GFC.

In a sign that the risk outlook for many businesses will deteriorate further, interim results for the June quarter reveal more than 62,000 firms were downgraded in April and May.

A risk downgrade indicates the probability of loss from a fall in a bond’s rating rather than a downgrading of a risk.

The March downgrades coincide with rising business payment terms that have now peaked at three year highs and declining expectations for sales and profits.

Corporate Health Watch also
reveals that the forestry and manufacturing industries were hit with the highest number of downgrades and that older firms fared worst than younger firms.

March quarter results show a significant percentage of businesses in the transportation and retail industries were at greater risk of financial distress than 12 months ago.

Transportation rose to 13 percent from 9 percent in first quarter 2010, while retail downgrades rose to 12 percent from 7 percent in first quarter 2010.

While no individual sector has seen its risk profile improve in the last twelve months, industries such as agriculture and the electric, gas and sanitary services have remained relatively stable since 2010.

The Northern Territory, Victoria and South Australia were the worst performing states.

D&B CEO Christine Christian argues that the latest risk data is a reminder that firm level risk is closely associated with business management fundamentals rather than simply related to the macroeconomic outlook.

"Almost exclusively business failure is a result of poor credit risk and negative cash flow," Christian says.

She says these factors are the primary cause of insolvency and warns that they can occur at any time regardless of the macroeconomic outlook.

"It is a reminder of the need for firms to pay attention to the fundamentals particularly at times when rapid growth places pressure on a firm’s cash flow."

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