Private Companies Positioned to Borrow, According to Sageworks

January, 2013 –Credit may still be difficult for privately held companies to attain. But these companies have improved two financial metrics that are often indicators of default risk, which suggests they are better positioned to borrow than at any point in the last few years.

The average debt-service-coverage ratio for private companies, which measures a firm’s ability to cover both principal and interest payments on loans, is the highest it has been in more than five years, according to the most recent data released by Sageworks, a financial information company.

Debt-service coverage is calculated as EBITDA, or earnings before interest, taxes, depreciation and amortization, divided by the current portion of long-term debt and interest. In the preliminary Sageworks estimates for 2012, the average debt-service coverage for privately held companies is more than five times. For the past few years, the figure has hovered between 4 in 2009 and 4.73 in 2011.

Sageworks preliminary data for private companies’ total liabilities shows that liabilities represent about 70 percent of total assets, compared with 74 to 75 percent of assets during the last four years. The liabilities-to-assets ratio is a rough measure of a firm’s equity cushion. Commercial lenders want this ratio to be as low as possible in business borrowers (generally at least below 1:1, which shows that a firm’s assets are entirely financed by debt).

The same positive trends for private companies have continued throughout 2012, according to month-to-month data from Sageworks.

The debt-service-coverage ratio and liabilities-to-assets are two metrics that help predict the probability of default for a company, the percentage likelihood that it will be unable to meet its financial obligations over a certain time period. These two ratios are variables within the 12-month probability of default model that Sageworks constructed thanks to data sharing relationships with banks across the country.

Congruent with the improved debt metrics, new data on commercial bankruptcies show that filings last year fell to a five-year low. The American Bankruptcy Institute announced this month that commercial bankruptcy filings were less than 56,000, which is significantly less than the more than 74,000 that were filed in 2011.

“It seems like there’s a high correlation between corporate bankruptcies and debt-service-coverage ratio and total liabilities to assets,” said Sageworks analyst Brandt Leahy. “Those two metrics kind of peaked in 2009, and it seems like we’re slowly getting stronger over the last couple of years in both of those metrics. As you can see, bankruptcies have also declined the last two years.”

Leahy said there could be many economic or managerial factors causing the debt-metric trends in Sageworks data. “But when companies aren’t sure of growth metrics, they tend to cut their debt because they may not be comfortable operating in high-leverage environments,” he said. “If you’re pretty comfortable sales are going to expand, you’re pretty comfortable taking on more debt.”

The increasing debt-service ratio and decreasing liabilities ratio might also suggest that these companies are unable to borrow, given the recent lending environment, Leahy said. While the trends are positive, it does not mean that U.S. private companies are “out of the woods” as far as credit risks.

About the Data

Sageworks possesses a proprietary database of privately held company financial statements aggregated by industry. Each day, approximately 1,000 of these financial statements are collected by Sageworks from accounting firms, banks, and credit unions through a cooperative data model with Sageworks clients. The data is segmented and can be queried by 1,200 industry codes, 70 financial metrics, company size, and geographic location.

About Sageworks, Inc.

Raleigh, NC-based Sageworks is a financial information company and creator of the Business Credit Report. Sageworks’ data and applications are used by thousands of accounting firms and banks across North America. The company has been named to the Inc. 500 list of the fastest growing privately held companies in the U.S. and to the Deloitte Technology Fast 500.

More News