S&P: UK Construction, Manufacturing SME’s Face Greatest Default Risks

September 23, 2008

A study, released in London by Standard & Poor’s Risk Solutions, analyzes the 2007 year end financial returns of UK SME’s [small and medium enterprises]. It found that, “not surprisingly,” the sector with “the highest default risk in 2008 is construction. Even the best of the bottom quartile of the industry is showing a one -year probability of default (PD) of 2.65 percent. Conversely the top quartile starts with PDs of just 0.7 percent and strengthens from there.”

S&P said: “Manufacturing too is showing significant risk of default, with the bottom quartile starting at a PD of 1.9 percent. The ‘wholesale and retail trade’ sector however has an average PD of 0.7 percent, an upper quartile starting at 0.3 percent and a bottom quartile starting at just 1.3 percent.

“These results show the dramatic differences in default risk between sectors in the UK, even among sectors most exposed to the credit crunch,” stated Stuart Shipperlee, head of PD model products for Standard & Poor’s Risk Solutions. “The bottom 25 percent of the construction industry is twice as likely to default as the equivalent firms in the trade sector and more than 10 times as likely that the strongest 25 percent of wholesale and retail traders.”

The study covers UK SME’s with annual turnover between £500,000 ($925,000) and £50 million ($92.5 million) and reflects a review of the 2007 year end accounts of 200,000 companies out of a total universe of 575,000 companies.

“The results may worsen as more accounts are received,” Shipperlee added; “since later filing of financial returns can be more common among weaker firms. Certainly, the results are unlikely to improve.”

Among the strongest sectors are those whose customers are often in the public sector (such as ‘Defense, Education and Social Work’) and primary industries such as ‘Agriculture’ and ‘Mining and Quarrying’.”

S&P also indicated that the risk of default “is clearly increasing in most sectors,” after having improved from 2003 to 2006. Shipperlee indicated that the that the main risk factors are industry driven as much as a function of the economic cycle. “Construction has shown approximately three times the default risk of the ‘Education’ sector throughout the last five years,” he explained.

The analysis was conducted using Standard & Poor’s Risk Solutions proprietary SME credit scoring service, Credit Risk Tracker UK. Ten different sector specific models covering 50 individual industries are available, along with PD’s on over 575,000 UK firms.

Source: Standard & Poor’s – www.standardandpoors.com

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