1111
Dr. Edward AltmanNYU Stern School of Business
Z-Score History & Credit Market Outlook
CT TMANew Haven, CTSeptember 26, 2017
Scoring Systems
2
• Qualitative (Subjective) – 1800s• Univariate (Accounting/Market Measures)
– Rating Agency (e.g. Moody’s (1909), S&P (1916) and Corporate (e.g., DuPont) Systems (early 1900s)
• Multivariate (Accounting/Market Measures) – Late 1960s (Z-Score) - Present– Discriminant, Logit, Probit Models (Linear, Quadratic)– Non-Linear and “Black-Box” Models (e.g., Recursive Partitioning Neural Networks,
1990s)
• Discriminant and Logit Models in Use for– Consumer Models - Fair Isaacs (FICO Scores)– Manufacturing Firms (1968) – Z-Scores– Extensions and Innovations for Specific Industries and Countries (1970s – Present)– ZETA Score – Industrials (1977)– Private Firm Models (e.g., Z’-Score (1983), Z”-Score (1995))– EM Score – Emerging Markets (1995)– Bank Specialized Systems (1990s)– SMEs (2000s)
• Option/Contingent Claims Models (1970s – Present)– Risk of Ruin (Wilcox, 1973)– KMVs Credit Monitor Model (1993) – Extensions of Merton (1974) Structural Framework
3
Scoring Systems(continued)
• Artificial Intelligence Systems (1990s – Present)– Expert Systems
– Neural Networks
– Machine Learning
• Blended Ratio/Market Value Models– Altman Z-Score (Fundamental Ratios and Market Values) – 1968
– Bond Score (Credit Sights, 2000; RiskCalc Moody’s, 2000)
– Hazard (Shumway), 2001)
– Kamakura’s Reduced Form, Term Structure Model (2002)
– Z-Metrics (Altman, et al, Risk Metrics, 2010)
• Re-introduction of Qualitative Factors/FinTech– Stand-alone Metrics, e.g., Invoices, Payment History
– Multiple Factors – Data Mining (Big Data Payments, Governance, time spent on individual firm reports [e.g., CreditRiskMonitor’s revised FRISK Scores, 2017], etc.)
– Enhanced Blended Models (2000s)
44
Major Agencies Bond Rating Categories
Moody's S&P/Fitch
Aaa AAAAa1 AA+Aa2 AAAa3 AA-A1 A+A2 AA3 A-
Baa1 BBB+Baa2 Investment BBBBaa3 Grade BBB-Ba1 High Yield BB+Ba2 ("Junk") BBBa3 BB-B1 B+B2 BB3 B-
Caa1 CCC+Caa CCC
Caa3 CCC-Ca CC
CC D
4
5
Problems With Traditional Financial Ratio Analysis
1 Univariate Technique
1-at-a-time
2 No “Bottom Line”
3 Subjective Weightings
4 Ambiguous
5 Misleading
6
Forecasting Distress With Discriminant Analysis
Linear Form
Z = a1x1 + a2x2 + a3x3 + …… + anxn
Z = Discriminant Score (Z Score)
a1 an = Discriminant Coefficients (Weights)
x1 xn = Discriminant Variables (e.g. Ratios)
Examplex
xx
xx
xx
x
x
xx
x
x x x
xx
x
x
xx
x x
xx
x
x
x
xx
xx
x x
x
x
xxx
EBIT
TA
EQUITY/DEBT
7
Z-Score Component Definitions and Weightings
Variable Definition Weighting Factor
X1 Working Capital 1.2
Total Assets
X2 Retained Earnings 1.4
Total Assets
X3 EBIT 3.3
Total Assets
X4 Market Value of Equity 0.6
Book Value of Total Liabilities
X5 Sales 1.0
Total Assets
8
Zones of Discrimination:Original Z - Score Model (1968)
Z > 2.99 - “Safe” Zone
1.8 < Z < 2.99 - “Grey” Zone
Z < 1.80 - “Distress” Zone
Time Series Impact On Corporate Z-Scores
9
• Credit Risk Migration- Greater Use of Leverage- Impact of HY Bond & LL Markets- Global Competition- More and Larger Bankruptcies
• Increased Type II Error
10
Estimating Probability of Default (PD) and Probability of Loss Given Defaults (LGD)Method #1
• Credit scores on new or existing debt
• Bond rating equivalents on new issues (Mortality) or existing issues (Rating Agency Cumulative Defaults)
• Utilizing mortality or cumulative default rates to estimate marginal and cumulative defaults
• Estimating Default Recoveries and Probability of Loss
Method #2
• Credit scores on new or existing debt
• Direct estimation of the probability of default
• Based on PDs, assign a rating
or
11
Median Z-Score by S&P Bond Rating for U.S. Manufacturing Firms: 1992 - 2013
Sources: Compustat Database, mainly S&P 500 firms, compilation by NYU Salomon Center, Stern School of Business.
Rating 2013 (No.) 2004-2010 1996-2001 1992-1995
AAA/AA 4.13 (15) 4.18 6.20* 4.80*
A 4.00 (64) 3.71 4.22 3.87
BBB 3.01 (131) 3.26 3.74 2.75
BB 2.69 (119) 2.48 2.81 2.25
B 1.66 (80) 1.74 1.80 1.87
CCC/CC 0.23 (3) 0.46 0.33 0.40
D 0.01 (33) -0.04 -0.20 0.05
*AAA Only.
12
All Rated Corporate Bonds*1971-2016
Mortality Rates by Original Rating
*Rated by S&P at IssuanceBased on 3,280 issues
Source: Standard & Poor's (New York) and Author's Compilation
Years After Issuance
1 2 3 4 5 6 7 8 9 10
AAA Marginal 0.00% 0.00% 0.00% 0.00% 0.01% 0.02% 0.01% 0.00% 0.00% 0.00%Cumulative 0.00% 0.00% 0.00% 0.00% 0.01% 0.03% 0.04% 0.04% 0.04% 0.04%
AA Marginal 0.00% 0.00% 0.20% 0.06% 0.02% 0.01% 0.01% 0.01% 0.02% 0.01%Cumulative 0.00% 0.00% 0.20% 0.26% 0.28% 0.29% 0.30% 0.31% 0.33% 0.34%
A Marginal 0.01% 0.03% 0.11% 0.12% 0.09% 0.05% 0.02% 0.24% 0.07% 0.04%Cumulative 0.01% 0.04% 0.15% 0.27% 0.36% 0.41% 0.43% 0.67% 0.74% 0.78%
BBB Marginal 0.32% 2.34% 1.24% 0.98% 0.49% 0.22% 0.25% 0.16% 0.17% 0.33%Cumulative 0.32% 2.65% 3.86% 4.80% 5.27% 5.48% 5.71% 5.86% 6.02% 6.33%
BB Marginal 0.92% 2.04% 3.85% 1.95% 2.42% 1.56% 1.44% 1.10% 1.41% 3.11%Cumulative 0.92% 2.94% 6.68% 8.50% 10.71% 12.11% 13.37% 14.32% 15.53% 18.16%
B Marginal 2.86% 7.67% 7.78% 7.75% 5.74% 4.46% 3.60% 2.05% 1.73% 0.75%Cumulative 2.86% 10.31% 17.29% 23.70% 28.08% 31.29% 33.76% 35.12% 36.24% 36.72%
CCC Marginal 8.11% 12.40% 17.75% 16.25% 4.90% 11.62% 5.40% 4.75% 0.64% 4.26%Cumulative 8.11% 19.50% 33.79% 44.55% 47.27% 53.40% 55.91% 58.01% 58.28% 60.05%
13
All Rated Corporate Bonds*1971-2016
Mortality Losses by Original Rating
*Rated by S&P at IssuanceBased on 2,714 issues
Source: Standard & Poor's (New York) and Author's Compilation
Years After Issuance
1 2 3 4 5 6 7 8 9 10
AAA Marginal 0.00% 0.00% 0.00% 0.00% 0.01% 0.01% 0.01% 0.00% 0.00% 0.00%Cumulative 0.00% 0.00% 0.00% 0.00% 0.01% 0.02% 0.03% 0.03% 0.03% 0.03%
AA Marginal 0.00% 0.00% 0.03% 0.02% 0.01% 0.01% 0.00% 0.01% 0.01% 0.01%Cumulative 0.00% 0.00% 0.03% 0.05% 0.06% 0.07% 0.07% 0.08% 0.09% 0.10%
A Marginal 0.00% 0.01% 0.04% 0.05% 0.05% 0.04% 0.02% 0.02% 0.05% 0.03%Cumulative 0.00% 0.01% 0.05% 0.10% 0.15% 0.19% 0.21% 0.23% 0.28% 0.31%
BBB Marginal 0.23% 1.53% 0.70% 0.58% 0.26% 0.16% 0.10% 0.09% 0.10% 0.18%Cumulative 0.23% 1.76% 2.44% 3.01% 3.26% 3.42% 3.51% 3.60% 3.70% 3.87%
BB Marginal 0.55% 1.18% 2.30% 1.11% 1.38% 0.74% 0.78% 0.48% 0.73% 1.09%Cumulative 0.55% 1.72% 3.98% 5.05% 6.36% 7.05% 7.78% 8.22% 8.89% 9.88%
B Marginal 1.92% 5.38% 5.32% 5.20% 3.79% 2.45% 2.34% 1.13% 0.91% 0.53%Cumulative 1.92% 7.20% 12.13% 16.70% 19.86% 21.82% 23.65% 24.52% 25.20% 25.60%
CCC Marginal 5.37% 8.68% 12.49% 11.45% 3.42% 8.61% 2.32% 3.34% 0.40% 2.72%Cumulative 5.37% 13.58% 24.38% 33.04% 35.33% 40.89% 42.27% 44.19% 44.42% 45.93%
14
Classification & Prediction AccuracyZ Score (1968) Failure Model*
1969-1975 1976-1995 1997-1999Year Prior Original Holdout Predictive Predictive PredictiveTo Failure Sample (33) Sample (25) Sample (86) Sample (110) Sample (120)
1 94% (88%) 96% (72%) 82% (75%) 85% (78%) 94% (84%)
2 72% 80% 68% 75% 74%
3 48% - - - -
4 29% - - - -
5 36% - - - -
*Using 2.67 as cutoff score (1.81 cutoff accuracy in parenthesis)
15
Z Score Trend - LTV Corp.
-1.5-1
-0.50
0.51
1.52
2.53
3.5
1980 1981 1982 1983 1984 1985 1986
Year
Z S
core
Grey Zone
Bankrupt
July ‘86
Safe Zone
Distress Zone
2.99
1.8
BB+BBB-
B- B-CCC+
CCC+
D
16
IBM CorporationZ Score (1980 – 2001)
00.5
11.5
22.5
33.5
44.5
55.5
6
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
Year
Z S
core
Operating Co.Safe Zone
Consolidated Co.
Grey Zone BBB
BB
B 1/93: Downgrade AAA to AA-
July 1993: Downgrade AA- to A
17Note: Consolidated Annual Results. Data Source: S&P Capital IQ, Bloomberg., Edgar
Z-Scores BRE
12/31/16 1.19 B-
12/31/15 1.30 B
12/31/14 1.41 B
12/31/13 1.52 B
12/31/12 1.49 B
12/31/11 1.59 B
12/31/10 1.56 B
12/31/09 0.28 CCC
03/31/09 (1.12) D
12/31/08 (0.63) D
12/31/07 0.77 CCC+
12/31/06 1.12 B-
12/31/05 0.96 CCC+
Z-Score Model Applied to General Motors (Consolidated Data):Bond Rating Equivalents and Scores from 2005 – 2016
18
Z-Score Model Applied to GM (Consolidated Data):Bond Rating Equivalents and Scores from 2005 – 2016
Z- Score: General Motors Co.
CCC+B-
CCC+
D
CCC
B B
D
B BB
B B-
-1.50
-1.00
-0.50
0.00
0.50
1.00
1.50
2.00
Dec
-05
Dec
-06
Dec
-07
Dec
-08
Dec
-09
Dec
-10
Dec
-11
Dec
-12
Dec
-13
Dec
-14
Dec
-15
Dec
-16
Z-Sc
ore
Z-Score
Ch. 11 Filing 6/01/09
Upgrade to BBB-by S&P9/25/14
Full Emergence from Bankruptcy
3/31/11
Emergence, New Co. Only, from Bankruptcy, 7/13/09
19
Applying the Z Score Models to Recent Energy & Mining Company Bankruptcies
Source: S&P Capital IQ
BREsZ-Score Z'‘-Score
t-1* t-2** t-1* t-2**# % # % # % # %
ABBB+BBBBBB-BB+ 1 2%BB 0 0%BB- 3 5%B+
2 6%1 2% 1 2%
B 3 5% 13 24%B- 3 5% 6 11%
CCC+5 16% 12 39%
1 2% 8 15%CCC 2 4% 8 15%CCC- 4 7% 9 16%D 26 84% 17 55% 41 75% 6 11%
Total 31 100% 31 100% 55 100% 55 100%
* One or Two Quarters before Filing** Five or Six Quarters before Filing
2015-9/15/2017
20
Additional Altman Z-Score Models:
Private Firm Model (1968)
Non-U.S., Emerging Markets Models for Non Financial Industrial Firms (1995)
e.g. Latin America (1977, 1995), China (2010), etc.
Sovereign Risk Bottom-Up Model (2010)
SME Models for the U.S. (2007) & Europe e.g. Italian Minibonds (2016), U.K. (2017), Spain (?)
21
Z’ ScorePrivate Firm Model
Z’ = .717X1 + .847X2 + 3.107X3 + .420X4 + .998X5
X1 = Current Assets - Current Liabilities
Total Assets
X2 = Retained Earnings
Total Assets
X3 = Earnings Before Interest and Taxes
Total Assets
X4 = Book Value of Equity
Total Liabilities
X5 = Sales
Total Assets
22
Z” Score Model for Manufacturers, Non-Manufacturer Industrials; Developed and Emerging Market Credits (1995)
Z” = 3.25 + 6.56X1 + 3.26X2 + 6.72X3 + 1.05X4
X1 = Current Assets - Current Liabilities
Total Assets
X2 = Retained Earnings
Total Assets
X3 = Earnings Before Interest and Taxes
Total Assets
X4 = Book Value of Equity
Total Liabilities
23
US Bond Rating Equivalents Based on Z”-Score Model
Z”=3.25+6.56X1+3.26X2+6.72X3+1.05X4
aSample Size in Parantheses. bInterpolated between CCC and CC/D. cBased on 94 Chapter 11 bankruptcy filings, 2010-2013.Sources: Compustat, Company Filings and S&P.
Rating Median 1996 Z”-Scorea Median 2006 Z”-Scorea Median 2013 Z”-Scorea
AAA/AA+ 8.15 (8) 7.51 (14) 8.80 (15)
AA/AA- 7.16 (33) 7.78 (20) 8.40 (17)
A+ 6.85 (24) 7.76 (26) 8.22 (23)
A 6.65 (42) 7.53 (61) 6.94 (48)
A- 6.40 (38) 7.10 (65) 6.12 (52)
BBB+ 6.25 (38) 6.47 (74) 5.80 (70)
BBB 5.85 (59) 6.41 (99) 5.75 (127)
BBB- 5.65 (52) 6.36 (76) 5.70 (96)
BB+ 5.25 (34) 6.25 (68) 5.65 (71)
BB 4.95 (25) 6.17 (114) 5.52 (100)
BB- 4.75 (65) 5.65 (173) 5.07 (121)
B+ 4.50 (78) 5.05 (164) 4.81 (93)
B 4.15 (115) 4.29 (139) 4.03 (100)
B- 3.75 (95) 3.68 (62) 3.74 (37)
CCC+ 3.20 (23) 2.98 (16) 2.84 (13)
CCC 2.50 (10) 2.20 (8) 2.57(3)
CCC- 1.75 (6) 1.62 (-)b 1.72 (-)b
CC/D 0 (14) 0.84 (120) 0.05 (94)c
24
Z and Z”-Score Models Applied to Sears, Roebuck & Co.:Bond Rating Equivalents and Scores from 2014 – 2016
Z and Z”- Score: Sears, Roebuck & Co.
0.00
0.50
1.00
1.50
2.00
2.50
3.00
2014 2015 2016
Z-Score Z"-Score
B+
B B-
D
CCC
CCC
25 2525
Current Conditions and Outlook in Global Credit Markets
Benign Credit Cycle? Is It Over?
26
• Length of Benign Credit Cycles: Is the Current Cycle Over? No.
• Default Rates (no)
• Default Forecast (no)
• Recovery Rates (no)
• Yields (no)
• Liquidity (no)
27
1978 – 2017 (Mid-year US$ billions)
Size of the US High-Yield Bond Market
Source: NYU Salomon Center estimates using Credit Suisse, S&P and Citi data.
$1,622
$-
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,80019
7819
7919
8019
8119
8219
8319
8419
8519
8619
8719
8819
8919
9019
9119
9219
9319
9419
9519
9619
9719
9819
9920
0020
0120
0220
0320
0420
0520
0620
0720
0820
0920
1020
1120
1220
1320
1420
1520
1620
17
$ (
Bil
lio
ns
)
Straight Bonds Only Excluding Defaulted Issues From Par Value Outstanding, (US$ millions), 1971 – 2017 (9/18)
Historical H.Y. Bond Default Rates
28
Year
Par Value Outstandinga
($)
Par Value Defaults
($)
Default Rates
(%)
2016 1,656,176 68,066 4.110
2015 1,595,839 45,122 2.827
2014 1,496,814 31,589 2.110
2013 1,392,212 14,539 1.044
2012 1,212,362 19,647 1.621
2011 1,354,649 17,963 1.326
2010 1,221,569 13,809 1.130
2009 1,152,952 123,878 10.744
2008 1,091,000 50,763 4.653
2007 1,075,400 5,473 0.509
2006 993,600 7,559 0.761
2005 1,073,000 36,209 3.375
2004 933,100 11,657 1.249
2003 825,000 38,451 4.661
2002 757,000 96,855 12.795
2001 649,000 63,609 9.801
2000 597,200 30,295 5.073
1999 567,400 23,532 4.147
1998 465,500 7,464 1.603
1997 335,400 4,200 1.252
1996 271,000 3,336 1.231
1995 240,000 4,551 1.896
1994 235,000 3,418 1.454
1993 206,907 2,287 1.105
1992 163,000 5,545 3.402
1991 183,600 18,862 10.273
1990 181,000 18,354 10.140
a Weighted by par value of amount outstanding for each year.
Year
Par Value Outstanding*
($)
Par Value
Defaults ($)
DefaultRates
(%)
1989 189,258 8,110 4.285
1988 148,187 3,944 2.6621987 129,557 7,486 5.778
1986 90.243 3,156 3.497
1985 58,088 992 1.708
1984 40,939 344 0.840
1983 27,492 301 1.095
1982 18,109 577 3.186
1981 17,115 27 0.158
1980 14,935 224 1.500
1979 10,356 20 0.193
1978 8,946 119 1.330
1977 8,157 381 4.671
1976 7,735 30 0.388
1975 7,471 204 2.731
1974 10,894 123 1.129
1973 7,824 49 0.626
1972 6,928 193 2.786
1971 6,602 82 1.242
StandardDeviation
(%)
Arithmetic Average Default Rate (%)
1971 to 2016 3.133 3.363
1978 to 2016 3.347 3.191
1985 to 2016 3.820 3.312
Weighted Average Default Rate (%)*
1971 to 2016 3.490
1978 to 2016 3.494
1985 to 2016 3.508
Median Annual Default Rate (%)
1971 to 2016 1.802
Source: NYU Salomon Center and Citigroup/Credit Suisse estimates
2017 (9/18) 1,622,365 21,481 1.324
Quarterly Default Rate and Four-Quarter Moving Average
1989 – 2017 (9/18)
Source: Author’s Compilations
Default Rates on High-Yield Bonds
29
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
4 -Q
uart
er M
ovin
g A
vera
ge
Qua
rter
ly D
efau
lt R
ate
Quarterly Moving
Filings for Chapter 11
30
Number of Filings and Pre-petition Liabilities of Filing Companies
1989 – 2017 (9/18)
Note: Minimum $100 million in liabilitiesSource: NYU Salomon Center Bankruptcy Filings Database
Mean 1989-2016: 75 filingsMedian 1989-2016: 57 filings
0
40
80
120
160
200
240
280
$0
$100
$200
$300
$400
$500
$600
$700
$800
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
(9/1
8)
$ B
illi
on
Pre- Petition Liabilities, in $ billions (left axis) Median Liabilities Number of Filings (right axis) Median No. of Filings.
2016 (9/18)
77 filings and liabilities of
$111.6 billion
2017 (9/18)
63 filings and liabilities of $81.1 billion
June 01, 2007 – September 18, 2017
Sources: Citigroup Yieldbook Index Data and Bank of America Merrill Lynch.31
YTM & Option-Adjusted Spreads Between High Yield Markets & U.S. Treasury Notes
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2,200
6/1/
2007
9/14
/200
7
12/3
1/20
07
4/15
/200
8
7/29
/200
8
11/1
1/20
08
2/26
/200
9
6/11
/200
9
9/24
/200
9
1/11
/201
0
4/26
/201
0
8/9/
2010
11/2
2/20
10
3/7/
2011
6/20
/201
1
10/3
/201
1
1/18
/201
2
5/2/
2012
8/15
/201
2
11/2
8/20
12
3/15
/201
3
6/28
/201
3
10/1
1/20
13
1/28
/201
4
5/13
/201
4
8/26
/201
4
12/9
/201
4
3/26
/201
5
7/9/
2015
10/2
2/20
15
2/8/
2016
5/23
/201
6
9/5/
2016
12/1
9/20
16
4/5/
2017
7/19
/201
7
Yield Spread (YTMS) OAS Average YTMS (1981-2016) Average OAS (1981-2016)
YTMS = 539bp,OAS = 544bp
12/16/08 (YTMS = 2,046bp, OAS = 2,144bp)
6/12/07 (YTMS = 260bp, OAS = 249bp)9/18/17 (YTMS = 397p, OAS = 368bp)
32
Comparative Health of High-Yield Firms (2007 vs. 2012/2014/3Q 2016)
Comparing Financial Strength of High-Yield Bond Issuers in 2007& 2012/2014/3Q 2016
33
YearAverage Z-Score/
(BRE)*Median Z-Score/
(BRE)*Average Z”-Score/
(BRE)*Median Z”-Score/
(BRE)*
2007 1.95 (B+) 1.84 (B+) 4.68 (B+) 4.82 (B+)
2012 1.76 (B) 1.73 (B) 4.54 (B) 4.63 (B)
2014 2.03 (B+) 1.85 (B+) 4.66 (B+) 4.74 (B+)
2016 (3Q) 1.97 (B+) 1.70 (B) 4.44 (B) 4.63 (B)
*Bond Rating EquivalentSource: Authors’ calculations, data from Altman and Hotchkiss (2006) and S&P Capital IQ/Compustat.
Number of Firms
Z-Score Z”-Score
2007 294 378
2012 396 486
2014 577 741
2016 (3Q) 581 742
Financial Distress (Z-Score) Prediction Applications
External (To The Firm) Analytics
Lenders (e.g., Pricing, Basel Capital Allocation)
Bond Investors (e.g., Quality Junk Portfolio
Long/Short Investment Strategy on Stocks (e.g.
Baskets of Strong Balance Sheet Companies &
Indexes, e.g. STOXX, Goldman, Nomura)
Security Analysts & Rating Agencies
Regulators & Government Agencies
Auditors (Audit Risk Model) – Going Concern
Advisors (e.g., Assessing Client’s Health)
M&A (e.g., Bottom Fishing)
Internal (To The Firm) & Research Analytics
To File or Not (e.g., General Motors)
Comparative Risk Profiles Over Time
Industrial Sector Assessment (e.g., Energy)
Sovereign Default Risk Assessment
Purchasers, Suppliers Assessment
Accounts Receivables Management
Researchers – Scholarly Studies
Chapter 22 Assessment
Managers – Managing a Financial Turnaround
MANAGING A FINANCIAL TURNAROUND: APPLICATIONS OF THE Z-SCORE MODEL
THE GTI CASE
35
Objectives
• To demonstrate that specific management tools which work are available in crisis situations
• To illustrate that predictive models can be turned “inside out” and used as internal management tools to, in effect, reverse their predictions
• To illustrate an interactive, as opposed to a passive, approach to financial decision making
36
Z-Score Component Definitions
Variable Definition Weighting Factor
X1
Working Capital
Total Assets1.2
X2
Retained Earnings
Total Assets1.4
X3
EBIT
Total Assets3.3
X4
Market Value of Equity
Book Value of Total Liabilities0.6
X5
Sales
Total Assets.999
37
Z-Score Distressed Firm Predictor:Application to GTI Corporation (1972 – 1975)
0.00
1.00
2.00
3.00
4.00
5.00
6.00
1972 1973 1974 1975
Z-Score
EPS = $0.09
EPS = $0.52
EPS = $0.19
EPS = ($1.27)
DistressZone
GreyZone
SafeZone
38
Management Tools Used
• Altman’s Distressed Firm Predictor (Z-Score)
• Function / Location Matrix
• Financial Statements
• Planning Systems
• Trend Charts
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Strategy Reason Impact
Consolidated Locations Eliminate Underutilized Assets
Z-Score
Drop Losing
Product Lines
Eliminate Unprofitable Underutilized Assets
Z-Score
Reduce Debt Using Funds Received from
Sale of Assets
Reduce Liabilities
and Total Assets
Z-Score
Managerial & Financial Restructuring Actions and Impact on Z-Score
40
Z-Score Distressed Firm PredictorApplication to GTI Corporation (1972 – 1984)
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
1972 1974 1976 1978 1980 1982 1984
Z-Score
EPS = $0.09
$0.52
$0.19
($1.27)
DistressZone
GreyZone
SafeZone
$0.15$0.28($0.29)
$0.70 $0.34
$0.40
41