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Default Risks Decline for Private Companies; Construction Industry Noted

February 07, 2013, 07:00 AM
Filed Under: Economic Commentary

Private U.S. companies are in a slightly better credit position than they were a year ago, according to new data from Sageworks.

The average probability that a private company would default in the next year was 4.40 percent for the 12-month period ended Dec. 31, compared with 4.51 percent for the year-earlier period. For the analysis, Sageworks used a predictive statistical model to calculate and then average the likelihood of default for the companies in Sageworks’ proprietary database.

This average probability of default, 4.40 percent, translates to a B credit rating, according to Sageworks, the provider of the Business Credit Report. That rating is unchanged from the previous 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,” noted 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.”

In 2012, private companies averaged a sales increase of 7.4 percent over their 2011 sales levels. Net profit margins boosted to nearly 8 percent from almost 5 percent in 2011, according to Sageworks’ preliminary estimates.

Bierman said these modest improvements in sales and profitability are showing up as a decrease in private-company 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.”

Sageworks also analyzed the default risk of five major industries within the U.S. economy; the probabilities of default for construction, manufacturing, wholesale trade, retail trade and professional/scientific/technical services have each improved slightly compared to the prior year. Construction saw the most improvement, Bierman noted.

Read the full Sageworks press release.

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