Assessing a firm’s credit default risk and supply chain impacts
This article is by David Croen, Enterprise Data, Risk and Entities at Bloomberg LP.
Background
Carillion PLC, the UK’s largest construction firm, entered into compulsory liquidation on 15 Jan 2018, after banks and the government declined to provide further support, triggering the UK’s largest corporate failure in a decade. The firm had over 43,000 employees (20,000+ in the UK), more than GBP 1.6bn in debts (generally valued at less than 5% of face value now) and a pension deficit of GBP 587mm.
What lessons could be learned? For example, could this development have been anticipated? Also, how could Carillion’s supply chain be affected?
The issue
The collapse will have implications throughout the UK, as Carillion is one of the largest managers of military facilities, has over 450 government contracts for hospitals, schools and courts, and has taken on GBP 1.4bn in critical work for the UK’s new HS2 railway line (Keir Group PLC will assume this work). The collapse could also impact as many as 30,000 subcontractors to which Carillion owes payments.
How could Bloomberg’s analytics be used to measure the risks of default and to evaluate the supply chain and completive impacts of the default?
The Bloomberg Default Risk (DRSK <GO>) function on the terminal which assesses the probability of default, shows that by July 13, 2017, there was a 4.85% probability of Carillion’s default. The firm scored as the second weakest high yield risk band, HY5, after announcing disappointing earnings and the first of three profit warnings. Default Risk data, which is available on both the terminal and via Enterprise Data, also shows a rapid increase in default probability as the share price decreased, and flagged the issue in July 2017.
The following table shows the current probability of default and risk band for Carillion, selected competitors, suppliers, lenders, according to Bloomberg’s Default Risk product, as well as the equity price change from June 30, 2017 to present, and as reported, the UK Government is monitoring Interserve.
Monitoring exposure and risk
Portfolio and risk managers can monitor Carillion’s relationships to evaluate supplier exposures and potential for losses to financial and commercial counterparties. Investors in Carillion or in competing firms, and even contractors and customers, could use Bloomberg’s supply chain analytics to evaluate the potential knock-on effects from the Carillion default. The Bloomberg Supply Chain function (SPLC <GO>) on the terminal, provides a list of Carillion’s suppliers and clients. As could be anticipated, a number of the company’s commercial partners experienced an increase in price volatility in the days following Carillion’s collapse.
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