Jack Zwingli
s e l e ct e d
topic
Identifying Bankruptcy Risk
I
n many cases, credit managers can easily predict corporate bankruptcies. Quite simply, a company
declares bankruptcy because it does not have adequate
capital to fund operations and remain solvent. Often,
bankruptcy is the result of taking on too much risk, and
this will be evident in a fundamental analysis of the
financial statements. It stands to reason that a corporation’s public disclosure would provide ample warning
of a high risk of bankruptcy…except when it doesn’t.
Indeed, among the 20 largest public company nonfinancial bankruptcy filings since 1980, nearly half were
accused by regulators of manipulating their earnings to
create the impression of a healthier company. And
among those in the highly-leveraged financial services
industry, whether or not they actually declared bankruptcy, the speed at which recent banking institutions
fell from grace and the inability of the marketplace to
value their assets gives one pause for concern as to
whether the traditional ways of gauging bankruptcy
risk has effectively protected stakeholders.
In the case of Lehman Brothers, in August 2007, the
bank announced it would eliminate its subprime lender
BNC Mortgage. After the announcement, the stock
price dropped a mere 34 cents to $57.20. On September
10th of the following year, Lehman’s share price was
$4.22, and five days later it became the largest bankruptcy filing ever.
Clearly we’v H[