distance to default (d2d) a health check of australian ... · distance to default (d2d) a health...

Distance to Default (D2D)A Health Check of Australian Listed Corporates

Carl Gunther – Restructuring Services—18 October 2018

D2D – What is it?

defaultnoun1. “failure to fulfil an obligation, especially to repay a

loan or appear in a law court”

3

Document Classification: KPMG Confidential

© 2018 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

Do you use a credit rating agency to mostly inform your credit decisions about a company?• Yes• No

Live Polling

4



What is D2D?

Historical financial information in

isolation

Distance to Default(D2D)

Over Time – “closer to or further away from default”

Share price and volatility

“Prior to default, it is difficult to discriminate between companies that will default and those that will not”

5



What is D2D?M

arke

t val

ue o

f ass

ets

Time

Default point

1

3

4

5

2

D2D is measured in standard deviation units

Market value of assets is driven by market cap and debt

Volatility of assets over time is driven by stock volatility

The length of the time horizon is 6 months

The default point is calculated as short-term debt plus ½ of long-term debt

5

4

3

2

1

6



What is D2D - illustration

-

0.50

1.00

1.50

2.00

2.50

3.00

Jun-16 Dec-16 Jun-17

D2D

sco

re

Construction and Engineering ASX

ABC Constructions Ltd

<1 D2D score

>3 D2D score

ABC Constructions Ltd relative to its sector and the ASX moving “closer” to default

7



D2D example – Paladin Energy Ltd

250300350400450500550600650700750

WE1

6123

0W

E170

106

WE1

7011

3W

E170

120

WE1

7012

7W

E170

203

WE1

7021

0W

E170

217

WE1

7022

4W

E170

303

WE1

7031

0W

E170

317

WE1

7032

4W

E170

331

WE1

7040

8W

E170

415

WE1

7042

2W

E170

429

WE1

7050

5W

E170

512

WE1

7051

9W

E170

526

WE1

7053

1W

E170

602

WE1

7060

9W

E170

616

WE1

7062

1W

E170

628

WE1

7070

5W

E170

712

Market value of assets Default point (Short term debt + Long term debt/2)

A$m

KPMG appointedvoluntary administrators

D2D Score 0.95

D2D Score 0.73

D2D Score 1.01

D2D findings June FY18

9



Do you think there will be more , less or the same levels of default across the economy:1. More2. Less3. same

Live Polling

10



Banker survey

More55%

Same45%

More Same

Credit / Risk team

No one responded Less

1. Do you think there will be more, less or the same levels of distress in the next 12 months?

11



What sector is expected to experience more distress in the next 2 years1. Real Estate / property 2. Banks3. Consumer4. Utilities5. Industrials6. Telco’s7. IT8. Mining services 9. Energy

Live Polling

12



Banker survey (cont.)

1%

2%

8%

12%

13%

14%

22%

28%

0% 10% 20% 30%

Services To ConstructionProfessional services

TransportMining services

AgriReal estate

Construction and property…Retail

Responses

Retail and Property key

risk areas

2. What are the key industries where you expect to see increased distress in the next 12 months

13



D2D June 18 (ASX)

“The ASX D2D score on average has been stable the past 12 months….”

1.661.55

1.751.93 1.96 1.97 1.98

0.00

0.50

1.00

1.50

2.00

2.50

D2D

sco

re

Average D2D (ASX)

588 652 641 614

733 767 778 970

275 363 360 378

0%

20%

40%

60%

80%

100%

HY17 FY17 HY18 FY18

% o

f com

pani

es

Total ASX D2D Score Breakdown

Below 1 Between 1 and 3 Above 3

14



D2D June 18 (All Sectors)

“…however 7 out of 11 sectors had declines in their D2D scores.”

15



614 (31%) 970 (50%) 378 (19%)

Below 1(Twilight Zone)

Between 1 to 3 Above 3

# of

com

pani

es

“…31% of companies have a D2D score <1 (the twilight zone)”.

D2D June 18 (ASX)

153

461 460

218183

10869 74

36 35

161

0

50

100

150

200

250

300

350

400

450

500

0 to 0.5 0.5 to 1 1 to 1.5 1.5 to 2 2 to 2.5 2.5 to 3 3 to 3.5 3.5 to 4 4 to 4.5 4.5 to 5 5.01 or more

16



Collective impairment charge Specific impairment charge

Source: KPMG analysis from ANZ, CBA, NAB, WBC Annual Reports

D2D HY 2018 (Bank’s asset quality)

“…2HFY18 impairment charges have increased suggesting challenges for the banks with rising household debt and borrowing costs"

Sectors further from default: Jun-18

D2D above 3

18



D2D FY18: D2D above 3

“4 sectors had a decline in the number of participants with D2D scores greater than 3”

19



Consumer Discretionary13%

Consumer Staples6%

Financials34%

Healthcare5%

Industrials8%

Materials8%

Real Estate16%

Other10%

D2D FY18: D2D above 3

“Financials and Real Estate comprise 50% of those companies >3”

378(Jun-18)

Sectors closer to default Jun-18

D2D below 1

21



D2D: FY18 below 1

“A number of sectors showed an increase in the number of companies moving into the twilight zone”

22



Materials43%

Energy19%

Information Technology15%

Healthcare4%

Financials5%

Consumer Discretionary6%

Other8%

D2D: FY18 below 1

“In total there were 618 companies (31% total ASX) with a D2D score below 1…

however a large group of companies remain Zombies…19% of the ASX”364

Zombies

Zombie: D2D below 1 in all past three half year periods

23



Zombies

“43% of Zombies are in Materials”

Industry and sector Analysis

25



Food

and

Sta

ples

Ret

ailin

g35

%

Cap

ital G

oods

15%

Phar

mac

eutic

als,

Bio

tech

nolo

gy

and

Life

Sci

ence

s14

%

Med

ia13

%

Mat

eria

ls7%

Insu

ranc

e-1

0%

Con

sum

er D

urab

les

and

Appa

rel

-11% Ba

nks

(indu

stry

gro

up)

-11% Hea

lthca

re E

quip

men

t an

d Se

rvic

es-1

4%

Tele

com

mun

icat

ion

Serv

ices

-22%

(30)%

(20)%

(10)%

-

10%

20%

30%

40%

2.08 2.41

6.45

D2D movements by industry group

“Healthcare, IT and Real Estate have been 3 of the largest underperformers over the past 12 months…”

1.521.33

2.23 3.81 1.87 1.92 1.75

26



Key trends – Healthcare“Margins under pressure with an impending RC into aged care ”

2014 18 18

3842 47 43

15 16 15 14

0%

20%

40%

60%

80%

100%

Jun-17 Dec-17 Jun-18 Oct-18

% o

f com

pani

es

Healthcare D2D breakdown


1.99 2.14

1.92

1.75

-

1.00

2.00

3.00


D2D

Sco

re

Healthcare vs ASX Average D2D score

Healthcare ASX

27



Key trends – Information Technology“Confidence rocked by unfulfilled expectations and poor transparency”

75 72 73 76

62 70 83 78

18 12 12 14

0%

20%

40%

60%

80%

100%


% o

f com

pani

es

IT D2D breakdown


1.50 1.40 1.41 1.40

-

1.00

2.00

3.00


D2D

Sco

re

IT vs ASX average D2D score

Information Technology ASX

28



Key trends – Real Estate“Significant headwinds with rising household debt and interest rates”

12 11 15 17

14 14 15 12

55 56 57 52

0%

20%

40%

60%

80%

100%


% o

f com

pani

es

Real Estate D2D breakdown


4.08 4.43 4.28 4.10

-

1.00

2.00

3.00

4.00

5.00


D2D

Sco

re

Real Estate vs ASX Average D2D score

Real Estate ASX

29



Construction sector

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

2013 2014 2015 2016 2017

EBIT

DA

Mar

gin

EBITDA Margin - Top 100, Top 10 and Bottom 10

Top 100 Top 10 Bottom 10

0

20

40

60

80

100

120

140

2013 2014 2015 2016 2017

Day

s

DPO top 10 companies v DSO Bottom 10 companies

Average DPO top 10 Average DSO Bottom 10

“A sector of the have’s and have not’s”

30



D2D if you want to know more?

Questions


kpmg.com.au kpmg.com.au/app

© 2018 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The KPMG name and logo are registered trademarks or trademarks of KPMG International.

Liability limited by a scheme approved under Professional Standards Legislation.

The information contained in this document is of a general nature and is not intended to address the objectives, financial situation or needs of any particular individual or entity. It is provided for information purposes only and does not constitute, nor should it be regarded in any manner whatsoever, as advice and is not intended to influence a person in making a decision, including, if applicable, in relation to any financial product or an interest in a financial product. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

To the extent permissible by law, KPMG and its associated entities shall not be liable for any errors, omissions, defects or misrepresentations in the information or for any loss or damage suffered by persons who use or rely on such information (including for reasons of negligence, negligent misstatement or otherwise).

Carl GuntherDeals Advisory – Restructuring ServicesPartner, Sydney, KPMG

Tel: + +61 2 9335 7381Mob: + 61 408 477 [email protected]

The contacts at KPMG in connection with this report are:

distance to default (d2d) a health check of australian ... · distance to default (d2d) a health...

Documents