Privately held U.S. companies, on average, have a slightly improved credit position than a year ago, according to new data from Sageworks Inc., a financial information company.
Using a predictive statistical model to evaluate privately held companies in Sageworks' proprietary database, the firm found that the average probability that a private company would default in the next year was 4.4 percent for the 12-month period ended Dec. 31, compared with 4.51 percent for the year-earlier period.
Sageworks collects financial statements for private companies from accounting firms, banks and credit unions through its cooperative data model, aggregating the data at an approximate rate of 1,000 statements a day, and analyzing the performance.
The average probability of default translates to a B credit rating, according to Sageworks, the provider of the Business Credit Report by Sageworks. That is unchanged from the rating for the year-earlier period.
"The average probability of default we are showing for private companies in our database is consistent with the sales performance and profitability we've reported for those companies," said Sageworks analyst Libby Bierman. "Their revenues and profit margins continue to increase, though maybe not at the high rates we saw after the recession and in 2011."
Privately held companies in 2012 saw an average 7.4 percent increase in sales over 2011, according to preliminary estimates for the most recent year. Net profit margins, on average, expanded to nearly 8 percent from almost 5 percent in 2011, Sageworks' estimates show.
Bierman said the modest improvements in private companies' sales and profitability are showing up as a decrease in their default risk.
"It makes sense that more profitable companies with less debt on their balance sheets will be a lower credit risk," she said. "And a tenth of a percent change may not seem significant, but it is a move in the right direction."
The probability of default is the percentage likelihood that a company will be unable to meet its financial obligations over the next 12 months. A default could include a borrower being 90 days past due on a loan, a loan being placed in a nonaccrual status, a write-down on the obligation, a troubled-debt restructuring, or a bankruptcy.
Sageworks' predictive model was developed by analyzing the historical default behavior of small business loans and the financial characteristics of both the businesses and their owners prior to default. It is based on more than 22,000 financial statements (including those of businesses and their owners) from over 6,600 businesses distributed across industries and sales ranges in the U.S. The predictive model is aimed at helping banks quantify and standardize their credit risk assessments, helping companies perform risk exposure due diligence on partner companies, and helping private businesses evaluate their own creditworthiness.
Congruent with Sageworks' findings of improved default risk, recent statistics on commercial bankruptcies show that filings last year fell to a five-year low. The American Bankruptcy Institute in January said commercial bankruptcy filings totaled 57,788 in 2012, compared with 74,415 in 2011. Filings in December alone were a third below the year-ago period.
Looking at five major industries within the U.S. economy, Sageworks found that the probabilities of default for construction, manufacturing, wholesale trade, retail trade and professional/scientific/technical services have each improved compared with a year earlier. Construction saw the most improvement, Bierman noted.
The average probability that a private construction company would default in the next year was 3.79 percent for the 12-month period ended Dec. 31, compared with 5.73 percent for the year-earlier period.
"The change in that industry's probability of default equates to improving from a B to a BB in credit scores, which can mean better access to credit or lower interest rates for companies that improved," she said. "Specific types of construction may be faring better than others, but this improved PD indicates that, as a whole, the industry is in better financial shape than it was last year."
The probability of default for retailers improved to 3.63 percent from 3.95 percent, while improvements for the other industries were less noticeable (see chart).