Veda Mid Market Risk Index

Mid market corporates more resilient as overall financial health improves

• Overall mid market corporate health continued to improve
• Mining market outlook stable bolstered by the balance sheet strength of surviving businesses
• High-density residential developers exposed to the risk of a sharp market downturn

Sydney, Australia, Thursday, 15 September 2016: The financial health of mid market corporations in Australia has improved according to a new report from Veda, Australia and New Zealand’s leading provider of consumer and commercial data and insights and a wholly-owned subsidiary of Equifax.

Corporates are now primed to withstand a slowing economy, although some sectors remain vulnerable.

The Veda Mid Market Risk Index (MMRI), which measures the risk of financial failure across a portfolio of more than 30,000 unique businesses, tracks the corporate health of Australia from 2005. The index reflects credit scores and ratings assigned in any given year relative to the index year (2005).

The index is a leading indicator of trends in external administration of Australian corporates, and provides advanced warning of turning points in the credit cycle.  

An upswing in the MMRI to 98.5[1] in 2015 reflected improvement in the financial flexibility, profitability and capitalisation of local mid market businesses.

The MMRI of 98.5 for the 12 months to December 2015[2] was an improvement on the previous year, when the Index recorded an overall value of 96. The 2015 index also shows a significant recovery from the Index’s historical low of 93.8 in 2009 in the aftermath of the GFC.

In the context of the Index, an MMRI value below 95 may point to the risk of a corporate capital market downturn.

Brad Walters, Veda’s Head of Ratings Services, said the overall increase in the Index had been driven in large part by a lift in credit quality in key industries like construction, manufacturing and transport.

“Contrary to some recent commentary, the construction sector has observed an improved credit quality, buoyed by strong levels of secured work and improving financial flexibility,” Mr Walters said.

However, despite the increasing stability of the construction sector overall, there are still pockets of risk.

“A major risk factor facing the sector is declining prospective activity levels in residential property development. The gap between building approvals and housing loan approvals is widening, which may be a precursor to a mismatch in supply and demand, especially in high-density apartment markets,” Mr Walters said.

“The mining sector has also taken a battering in recent times, and remains sensitive to commodity price fluctuations. However, lower residual commodity price downside risk and survivorship bias support the risk profile of typical constituents of the industry,” he added.

Across sectors, there are variations in risk profiles:

• The mining industry risk outlook is stable. Rising iron ore export volumes are expected to offset some of the price headwinds to revenue growth in the segment, while a lower domestic exchange rate will support profitability. Liquidity is strong, and should remain so, while leverage is expected to remain low in the year ahead, assuming there is no material deterioration in commodity prices.
   
• The risk outlook for the construction industry is stable. Order books have been bolstered by an increase in demand for infrastructure and residential construction. Profitability is improving, with rising demand also expected to moderate competitive pressures on margins. Cash flow is stabilising, and is expected to benefit from a cyclical release of working capital. Leverage is also improving, with repayment of debt delivering better financial flexibility.
   
• Manufacturing faces several headwinds. Cash flow in the manufacturing industry is deteriorating. The rising cost of imported inputs is expected to offset improvements in cash flow that may result from higher sales volumes. Leverage is expected to remain stable due to limited flexibility to retire debt with internally generated cash flow.
   
• Regulatory uncertainty threatens the outlook of the healthcare sector. The industry has seen high demand for its products and services in recent years; however, regulatory risk is a threat to prospective revenue growth. Profit margins have grown at a slower pace in recent years, due to rising co-payments and high product elasticity for non-essential medical services. Despite this, operating cash flow should remain stable over the next 12 months but leverage is expected to increase as a result of ongoing consolidation in the sector.

The full report can be accessed here: https://www.veda.com.au/sites/default/files/docs/mid_market_risk_index_jun16_hr_final.pdf

NOTE TO EDITORS
The Veda Mid Market Risk Index is an index of corporate credit ratings and credit scores assigned by Veda Credit Ratings – an ASIC-licenced, Australian domiciled credit ratings agency. The index value is an average of credit scores and ratings assigned in any given year. The base year for the index is 2005. The index is a leading indicator of trends in external administration of Australian corporates. It derives its predictive capacity from the breadth of coverage and depth of analysis of the underlying credit ratings, which are forward-looking assessments of the risk of default. The index may provide up to 12 months warning of turning points in the credit cycle.

As the index relates to the financial performance of more than 30,000 businesses, many of which lodge their financial statements six to nine months after the balance date, the results of the index can only be released several months after the end of the reporting period.