Bankruptcy Risk

Did You Miss Early Warning Signals for Companies Reporting Default in 2020?

Corporate default or bankruptcy does not happen overnight. There is a sequence of events happening over a period which leads to credit default or bankruptcy.

Amukha has detected a pattern of events leading to default or bankruptcy through analysis of news data. Our study of news data for more than 140 listed companies that have reported default on interest or principal or both in 2020 showed:

a) A spike in negative news flow under Red-flag oriented categories ahead of default. Legal, regulatory, management change, restructuring, stake sale by financial institutions, and financial distress/crime are some of the categories which dominated the red-flag oriented news flow before default.

b) News sentiment remained negative for operating performance-related categories before the default. Operating performance was weighed down by mainly negative earnings coverage followed by credit rating.

c) Sentiment for market-oriented news flow turned negative amid pessimistic media coverage under hot stocks, capital market, and stock rating categories in 2019.

d) Growth-oriented news flow witnessed a sharp decline in sentiment due to negative media coverage under expansion and product launch categories in 2019.

CG Power & Industrial Solutions is one such company which has disclosed default on loan repayment earlier this year. Amukha has detected a series of news events for CG Power in 3-years before the announcement of default in 2020.

CG Power has consistently seen poor earnings performance for the past several quarters. As a result, the company attracted negative stock commentary and witnessed the dumping of shares by financial institutions. It has made several attempts to restructure the business via the sale of assets and divestment of overseas units, but that failed to improve the financial performance. The mounting losses and liquidity crisis could have forced the promoters to pledge their entire shareholding in December 2018 quarter, which was later invoked by the lenders. And subsequently, the company was hit by financial fraud in August 2019.

Besides, there were two major red flags on CG Power ahead of fraud detection in August 2019. IDFC Securities raised concerns about loans given to group entities and flagged corporate governance issues at CG Power in November 2018, i.e., three quarters ahead of fraud discovery. Moreover, CG Power has also reported a delay in disclosing financial results for Mar’19 and Jun’19 quarters, a few months before the discovery of fraud.

All these events, captured in the news articles, could have acted as early warning signals for the impending credit default. The series of negative events also triggered a downtrend in our long-term news sentiment score in November 2018, i.e., three quarters ahead of fraud discovery.

By leveraging news data, the banks can uncover the key trends in broader categories such as red flags, operating performance, growth, and market, which can help them predict overall default risk for the loan portfolio. A further deep-dive into news data can help the banks identify pre-default behavior in the corporate borrower ahead of time.

If you are unable to pick such early warning signals from news data for portfolio companies, Amukha is here to help you.

To know more about Amukha’s Risk Analytics System, email us at info@amukha.com.

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