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