By Lev Janashvili
Automotive battery maker Exide Technologies Inc. filed for Chapter 11 bankruptcy protection today. According to filings with the U.S. Bankruptcy Court in Delaware, the company plans to implement a restructuring de-lever balance sheet and create a sustainable capital structure.
Since June 2012, GMI Ratings’ Financial Distress Risk Model has rated Exide Technologies as “high risk” for financial distress. The most recent score for XIDE placed the company in the lowest 1 percentile of all companies in North America, indicating higher chance of financial distress than 99% of comparable companies rated by GMI.
The GMI Financial Distress Model is based on three primary components:
1. Accounting Factors are measures found to be predictive of financial distress, including liquidity (does the company have cash to fund operations?), leverage (does the company have too much debt?), and profitability (is the company making money?)
2. Merton Distance-to-Default represents the statistical distance between the market value of the firm’s assets and its relevant liabilities. The valuation approach is based on option theory, with critical inputs being the market value and volatility of the firm’s equity, and the face value of its liabilities. As the market value of the equity declines, the chances increase that the value of the firm will be less than its debt, and the probability of default increases.
3. The AGR Rating is represented by a percentile score of 1-100, with the riskiest companies having the lowest score. The AGR rating indicates the transparency and reliability of financial disclosure, based on statistical analysis of forensic accounting and corporate governance measures of risk. XIDE’s AGR score reflects the impact of the following red-flagged metrics:
- Comp: CEO /CFO Total Comp
- Pension Liability Discount Rate Domestic
- Leverage Ratio: Debt/Equity
- Liquidity: Cash Ratio
- Pension Comp Expected Rate of Increase Domestic
With questions about GMI Ratings’ Financial Distress Litigation Risk models, please email us at firstname.lastname@example.org.