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Survey: Private Companies More Creditworthy

June 20, 2013, 07:02 AM
Filed Under: Economic Commentary
Related: Sageworks

By several financial metrics, private companies appear to be well positioned to take on additional debt, according to recent data from Sageworks, a financial information company. But whether they are finding willing lenders or are even willing to borrow may be another story. 
Sageworks’ latest Private Company Report shows that private companies, on average, are less likely to default than they were a year ago. The average probability of default for private companies that filed annual statements between November 2012 and April 2013 was 4.1 percent, compared with 5.1 percent in the comparable year-ago period.

“The improvement in default rates, coupled with healthy sales and profitability show that private companies may be well positioned to borrow,” said Sageworks Chairman Brian Hamilton. 
Interest coverage is stronger, on average, and ratios of debt to liabilities, to equity and to earnings before interest, taxes, depreciation and amortization (EBITDA) are each lower than a year earlier for private companies, on average, Sageworks data shows. 
Meanwhile, private companies are posting annual sales growth of about 10 percent and profit margins are near 7 percent, according to the Private Company Report. (Net profit margin has been adjusted to exclude taxes and include owner compensation in excess of their market-rate salaries -- adjustments commonly made to private-company financials in order to provide a more accurate picture of the companies’ operational performance.)

Even though commercial and industrial loans have been increasing in the U.S. as a whole, not all companies are finding financial institutions have loosened credit standards or terms. 
Two-thirds of business owners in a recent survey by Pepperdine University described the current business environment as difficult to raise new financing. That’s a little lower than the 75 percent who characterized it the same way a year ago. At the same time, however, fewer business owners are apparently finding success when they seek bank loans. Only one-third of those who applied for bank loans reported being successful, which is down from 41 percent finding success a year earlier, the same survey found. 
Whatever the reason, companies in general continue to show caution in their views on borrowing – and in their hiring. U.S. employers added about 175,000 jobs in May, the Labor Department said recently, but unemployment still rose to 7.6 percent from 7.5 percent as more people looked for work. 
“Not only are companies not really hiring a ton but they’re not borrowing a bunch either,” Hamilton told ABC News. “They really are just reluctant to take on overhead much more so than in the past.” 
Sageworks analyst Michael Lubansky noted that while companies have deleveraged in recent years, they are not yet at leverage levels seen before the recession. 
“Companies had been sitting on a lot of cash and they still have that cash. Maybe they’re starting to use some of it for expansion, but at some point, they will reach an equilibrium where they don’t want to use cash to expand and will borrow,” Lubansky said. “At the same time, with interest rates so low, it’s a little counterintuitive that they would use cash now instead of borrowing.”

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