RapidRatings is very proud our of model's accuracy rates, so we make sure we publish clear performance summaries each year. Our scope of analysis now covers more than 25 years, from 1991 to 2020, and includes 1700+ default events. Over this time more than 90% of defaults have occurred with an FHR signaling High or Very High Risk.
Figure 1: Default Frequencies at each FHR
These results show that firms with lower FHRs are more likely to default than those with higher FHRs. Almost as important, these results show that a company with an FHR which is Low or Very Low Risk very rarely defaults. Negative shocks happen for these firms, but with an FHR above 60, they are able to weather the storm.
Low Risk firms are exceptionally unlikely to experience an event which they are unable to survive.
Firms which default have a specific financial profile, and when we issue a High Risk rating, we are identifying that the given company has more characteristics in common which a company which defaults than a company which survives.
Results from 2020
Following is a summary of the risk profiles exhibited by the 78 defaulters from 2020 at the time of and approaching default:
- The average FHR at default was 27. Twelve months prior to default: 38. Thirty-six months prior: 40.
- 50% of firms defaulted with an FHR below 26, 90% defaulted with an FHR below 39.
- 90% of defaulters filed for bankruptcy while rated High or Very High Risk (FHR below 40).
Our most recent Annual Default Review presents a detailed analysis of defaults over the last 5 years, including all defaulters from the prior calendar year. Please reach out to email@example.com if you're interested in this level of detail.