Altman Z-Score+

Altman Z-‐Score+

Comparing and Improving upon Credit Scoring Systems

Sribatsa Das, MBA

Agenda

•  What is Altman Z-‐Score+ •  Benefits, Features & Audience •  Credit Scoring Methodology •  Credit Scoring Systems •  Altman Z-‐Score+ Bloomberg Power App •  Desktop, Mobile, Web & Web Service •  Web Service •  Live analysis using Bloomberg Power App •  Live analysis using Web App •  Summary •  Q&A •  Appendix

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What is Altman Z-‐Score+

Altman Z-‐Score+ is a corporate credit scoring system developed in collaboraPon with Dr. Ed Altman, Professor of Finance at NYU Stern School of Business.

Classic Enhancements

•  Generate Z, Z’ & Z” Scores for public & private firms

•  EsPmate Bond RaPng Equivalent (BRE) •  Predict 1-‐10 years of Probability of

Default (PD)   ExisPng bond/loan   New Bond/loan

•  Rank firms within and across industry

Insights beyond the tradi5onal Z-‐Score!


Benefits, Features and Audience

Benefits Features

•  Analyze credit risk •  Spot investment opportuniPes •  Develop trading strategy •  IdenPfy turnaround opportuniPes •  Use BRE for loan pricing and valuaPon •  Monitor long-‐term solvency •  MiPgate supply chain risk •  MiPgate account receivables risk

•  Analyze credit risk of a public company •  Analyze historical trend of public

companies •  Compare 2 or more public companies •  Analyze credit risk of companies in a

por`olio •  Enter data or upload file to analyze

both private and public companies

Target Audience

•  Common stock and corporate bond investors •  SecuriPzaPon specialists •  Financial Advisors •  Credit officers at financial insPtuPons •  Turnaround pracPPoners •  Bankruptcy and Restructuring Lawyers •  Corporate officers and Auditors


Agenda



Credit Scoring Methodology

BRE

1-‐10 years ExisPng Bond/Loan PD

1-‐10 years New Bond/Loan PD

US

Public

MFG Z”

Z’

Z

NWC = CA-‐CL

BV LiabiliPes

Retained Earnings

Total Assets

MV of EquiPes

BV EquiPes

LTM EBIT

Intangibles (if available)

LTM Sales

PercenPle Ranking within Industry

PercenPle Ranking Across Industry

Industry

Z-‐Series Score

Z/Z’ Z

Z’/Z”

CLASSIFICATION DATA ANALYSIS

YES

NO

YES

YES

NO

NO


Z-‐Series Score Formula


Note: If intangible assets is available, Net Tangible Assets is used instead of Total Assets

Data ObservaPons – zero and negaPve values

•  Net Working Capital (NWC) can be –ve – Firm using vendor financing

•  EBIT can be –ve – Reflects a net loss

•  Retained Earning can be –ve – Ending R/E=Beginning R/E + NI – Dividend

•  Net loss •  Or, dividend paid is higher than Net Income


ExisPng vs. New Bond/Loan PD


PD 1-‐10 years into the future

New Bond/Loan PD

Historical experience of over 2,500 defaulPng firms over the period 1971-‐2010 as aggregated by Professor Altman in his highly acclaimed "mortality rate" approach.

This approach analyzes firm incidence of default in a manner similar to an insurance actuary's assessment of "new-‐born" human beings.

Newly issued securiPes

Type Methodology

Usage

ExisPng Bond/Loan PD

Historical incidence of default 1-‐10 years for issues/firms with a certain bond raPng as of some point in Pme.

Accounts Receivable

Accounts Payable

ExisPng bonds/loans

IMPR

OVE

MEN

TS

BRE and PD offer deeper analysis


Year CumulaPve ExisPng

Bond/Loan PD %

CumulaPve New Bond/Loan PD %

1 0.03 0.01

2 0.05 0.05

3 0.37 0.25

4 0.59 0.41

5 0.76 0.51

6 0.93 0.59

7 1.01 0.62

8 1.13 0.83

9 1.27 0.90

10 1.51 0.95

Z-‐Score 4.47

BRE A1/A+

3.0 1.81

GREEN GRAY RED

Z-‐Score Ba

nd

1

2

3

PercenPle Ranking within industry

PercenPle Ranking across manufacturing sector

76% 75%

Some applicaPons of BRE


BRE

+ MRP

+ Spread

Investment Strategy

Discount Rate

Loan Pricing

PUT OpPon

UnderwriPng

ValuaPon

Premium

ValuaPon – BRE can serve as discount rate


FCF1 FCF2 FCF3 FCF4 FCF5

Terminal Value

T=0

Horizon period

•  Enterprise Value = Net Present Value (NPV) of Free Cash Flow (FCF) + Present Value (PV) of Terminal Value + Net Debt (Debt – Cash)

•  BRE + Market Risk Premium (MRP) can serve as discount rate

PUT OpPon


PUT OpPon


Lower security price Higher Payoff

Agenda



Credit Scoring Systems

Web Bloomberg Power App Mobile App

Desktop

Web Service

SYSTEM

S

Bankers

Traders

Por`olio Managers

Risk Officers

Hedge Fund Managers

A/R Managers

Supply Chain Managers

Controllers

Auditors

Lawyers

Credit Officers Insurance Underwriters

Consultants Internal Corporate Users

Financial Franchises

ERP Systems

UnderwriPng Systems

Approval Systems

Travellers

AUDIEN

CE

Heavy Financial Analysis Convenience Office Use Enterprise Systems

USA

GE


Agenda



•  Provides access to public firms worldwide •  Offers value beyond AZS command

–  BRE –  PercenPle Ranking –  PD

•  Requires Bloomberg Terminal •  Access via APPS ALTMAN <GO>


Altman Z-‐Score+ Bloomberg Power App

APPS ALTMAN <GO>


Mobile, Desktop, Web Apps & Web Service

Processing Engine

Desktop Mobile Web Web Service

•  Analyze public industrial firms listed in the United States and Canada –  6,000+ industrial companies available –  Three years history is available


Excel Plug-‐in

Agenda



Web Service

Modularity Produc5vity Portability

•  Pla`orm agnosPc •  SOAP/REST Protocol •  Java, C#, VB, PHP, HTML

•  Faster Time-‐To-‐Market •  Minimal learning curve •  Client stubs available

•  Plug-‐N-‐Play across applicaPons

•  Select any funcPon

KEY BENEFITS

KEY FEATURES

•  Integrate with enterprise systems •  Perform the analysis seamlessly without switching applicaPons


How does Web Service work?


AltmanZScoreService Web Service

APIs

Enterprise ApplicaPon

User clicks a buJon

ApplicaPon sends a request in the background

Result displayed ApplicaPon receives a response

Request

Response

1

3 4

2

Web Service APIs

Analyze Data Analyze US and Canada listed public companies

analyzeCompany fetchAllIndustries

analyzeCompanies fetchAllManufacturingIndustries

analyzeCompanyQuarterly fetchAllNonManufacturingIndustries

analyzeCompaniesQuarterly fetchAnalysisOfMulPpleCompanies

analyzeUSPublicManufacturingCompany fetchBRE

analyzeUSPrivateManufacturingCompany fetchCompanyAnalysis

analyzeUSNonManufacturingAndNonUSCompany fetchCompanyList

calculateZScore fetchHistoricalAnalysisOfMulPpleCompanies

calculateZPrimeScore fetchHistoricalCompanyAnalysis

calculateZDoublePrimeScore fetchIndustryTitle

esPmateBRE fetchPD

predictPD fetchPDForYearN

esPmateStaPsPcalPD fetchPercenPleRanking

fetchSICCodes

fetchZDoublePrimeScore

fetchZScore

predictPDForYearN

scan

scanForCompanyList

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Live analysis using Altman Z-‐Score+ Bloomberg Power App


Live analysis using Altman Z-‐Score+ Web App


Summary

•  Apps offers insight beyond tradiPonal Z-‐Score •  BRE, Percen5le Ranking and PD

•  Apps offers trending and predicPve capabiliPes

•  Apps are simple and easy to use


Q&A


APPENDIX


Altman Z-‐Score+ Bloomberg Power App Screenshots


Analyze a company


Analyze historical trends


Compare companies


Analyze a por`olio


Analyze a score


Analyze one year Financial


Analyze three years Financials


Analyze financial data File


Analyze score file


Mobile App Screenshots


iOS App -‐ Analyze


Analyze Company


Analyze Score


Company Snapshot


Company History & Compare Companies


Scan


Web App Screenshots



Summary – Scores, BRE, PercenPle and PDs over Pme

Comparison of scores and long-‐term solvency risk


Comparison of Scores

Long-‐term solvency risk


Scan for companies based on mulPple criteria

Our contact details Contact: Web Site: hJp://altmanzscoreplus.com E-‐Mail: [email protected] Telephone: +1 (973) 944-‐3989 Bloomberg Terminal: APPS ALTMAN <GO> Social Media: TwiJer: hJp://twiJer.com/altmanzscore Facebook: hJp://facebook.com/altmanzscoreplus LinkedIn: hJp://www.linkedin.com/groups/Altman-‐ZScore-‐4328953?trk=myg_ugrp_ovr Video Channel: YouTube Channel: hJp://youtube.com/altmanzscoreplus


Altman Z-Score+

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Transcript of Altman Z-Score+