Brazil’s Weak Recovery: The FRISK® Score Identifies Troubled Companies

Brazil and the FRISK® score

Brazil, the eighth-largest economy in the world, has experienced an anemic recovery from its 2014 recession. Fitch Ratings and DBRS downgraded Brazil’s junk sovereign credit rating in 2018 due to the country’s steep fiscal deficits, escalating public debt and poor reformation activity. Newly elected President Jair Bolsonaro will need to make significant changes to right size the economy. Amid currently poor business conditions, corporations with high financial risk should be carefully monitored.

CreditRiskMonitor is a leading web-based financial risk analysis and news service designed for credit, supply chain and financial professionals. Subscribers include thousands of risk professionals all over the globe, including employees from more than 35% of the Fortune 1000. Three important features of the CreditRiskMonitor service are:

  • Commercial credit report coverage spanning more than 58,000 global public companies and more than 80,000 of the largest private companies
  • The FRISK® score, which is 96% accurate* in predicting public company financial stress and bankruptcy risk
  • The FRISK® Stress Index, a free-to-use tool which measures the probability of failure across a group of companies in any industry, country or customized portfolio

The FRISK® Stress Index

Brazil’s economic troubles have been long-lasting with flat-to-negative GDP growth going back to 2014. Brazil’s fiscal deficit has also been severe, expanding as far as 10% relative to GDP, partly due to aggressive spending to keep the economy afloat. Despite this fiscal stimulus, unemployment stands at a decade-high of more than 12%. With its persistent budget deficit, public debt has ballooned and will continue to rise for the foreseeable future. Borrowing rates also remain excessive – trending between 6.5% and 11% across Brazil’s yield curve.

These economic challenges have impacted public companies. At the depths of Brazil’s recession, the FRISK® Stress Index peaked at around 2.5. This figure indicates that aggregate public company financial stress was about 2.5 times worse compared to normal economic periods.

Brazil and the FRISK® Stress Index
At the depths of Brazil’s recession, the FRISK® Stress Index peaked at around 2.5.

Financial risk has improved in the last few years but it remains elevated at 1.6. This level is still broadly equivalent to the trouble experienced during the 2008 Global Financial Crisis as shown above. Nearly 40% of Brazil’s public companies are in the FRISK® score “red zone,” falling into the bottom half of the FRISK® score scale. The FRISK® score measures company financial risk based on a “1” (highest risk) to “10” (lowest risk) scale. The red zone indicates that a company is financially stressed and has an elevated probability of failure, as shown in the chart below:

The FRISK® score

Corporate Casualties

One noteworthy example is Liq Participacoes SA. This large operator offers customer relationship management and marketing. Some of Liq’s customers are located in Brazil and throughout Latin America. Its sales have declined by double digits for several years, where a portion of lost revenue was due to Oi SA, one of the major telecom providers. Oi SA filed for Judicial Reorganization in mid-2016 and had to make significant cuts to its operating structure. Other customers also cut spending, which has negatively impacted Liq.

Liq’s FRISK® score has fallen from a “3” to a “1” within the last 18 months, highlighting extreme financial stress. A score of “1” indicates a 10-to-50% probability of corporate failure in the coming year. 

Liq Participacoes SA's FRISK® score
Liq’s FRISK® score has fallen from a “3” to a “1” within the last 18 months, highlighting extreme financial stress.

Liq completed a distressed debt exchange during 2018, paring down its outstanding debt. However, the company’s total liabilities relative to total assets still measures an extremely high leverage ratio of 95%. Tangible net worth has also been persistently negative.  

Regarding performance, annualized net sales are 1.5 billion Real (or $400 million), but its gross margin has fallen to negative 2% on a trailing 12-month basis. This trend reflects aggressive competition and the lack of pricing power afforded by its business model. Simply layering in selling, general and administrative expenses, as well as interest costs leave the company generating massive net losses. With negative free cash flow on the horizon, liquidity will be significantly pressured in the coming 12 months. Those who do business with Liq need to monitor the company’s dwindling cash position, which could lead to corporate failure if performance doesn’t improve.

Bottom Line

Brazil maintains a junk sovereign credit rating, whereby borrowing rates are expensive and business conditions broadly remain weak. If the Brazilian economy were to make a turn for the worse – which could stem from either internal or external factors – red zone corporations would be severely exposed. Liq Participacoes SA is just one example that has deeply suffered from long-lasting weakness in Brazil’s economy. Unfortunately there are many more troubled names to watch in the country, with about 40% of Brazilian public companies in the high-risk FRISK® score red zone. If you do business with any international company, the CreditRiskMonitor service can help protect your business.

*As backtested on U.S. public companies; results may vary for private companies and by country. All references to the FRISK® score’s accuracy on the CreditRiskMonitor website are qualified by this statement.

About CreditRiskMonitor

CreditRiskMonitor is a financial news and analysis service designed to help professionals stay ahead of public company risk quickly, accurately and cost-effectively. More than 35% of the Fortune 1000, plus thousands more worldwide, rely on our commercial credit reporting and predictive risk analytics for assessing the financial stability of more than 56,000 global public companies.

At the core of CreditRiskMonitor’s service is its 96%-accurate FRISK® score, which is formulated to predict public company bankruptcy risk. One of four key components calculated in the FRISK® score is crowdsourced subscriber activity. This unique system tracks subscribers' patterns of research activity, capturing and aggregating the real-time concerns of what are essentially the key gatekeepers of corporate credit. Other features of CreditRiskMonitor’s service include timely news alerts, the Altman Z”-Score, agency ratings, financial ratios and trends. CreditRiskMonitor’s network of trade contributors provides more than $150 billion in trade data on their counterparties every month, giving them visibility into their biggest dollar risks.