The Predictive Power of KRIS – Case Study of Sahaviriya Steel

11/19/2015 07:41 AM

Company Profile
Sahaviriya Steel Industries Public Company Limited, together with its subsidiaries, manufactured and distributed hot rolled coils in Thailand. The company operated in four segments: Manufacture of Hot Rolled Coils, Maintenance Services, Deep-Sea Port Services, and Coke Manufacturing and Steel Making Plants. It offered hot rolled steel sheets in coils, hot-rolled coils pickled and oiled products, and cold-rolled steel sheets. The company’s products have been used in the construction, pipe and tube, gas cylinder, container, furniture, automotive, and cold rolled steel industries. It also produced integrated iron and steel slabs; and provided deep-sea port, marine shipping, and maintenance services. Sahaviriya Steel Industries Public Company Limited was founded in 1990 and was based in Bangkok, Thailand.

No stranger to default
Sahaviriya Steel, founded in 1990, is not new to defaults. The group was among Thailand’s biggest bad debtors during the Asian financial crisis almost two decades ago, and in 1999 recovered from insolvency as part of a 21-billion-baht debt restructuring programme. Siam Commercial Bank was one of the lead lenders at that time.

The company came to control the Teesside steel plant after purchasing it from India’s Tata Steel Ltd in 2011. Even at that time, the plant was losing money. The Viriyaprapaikit family’s other companies have included property developer Sahaviriya City Plc and a predecessor company to computer distributor SVOA Plc. Both defaulted on their debt during the Asian financial crisis.

Losses at the steel group more than doubled to 6.3 billion baht in the first six months of this year from the same period of 2014, the latest financial accounts show. It had 74.3 billion baht of liabilities as of June 30 and 140.5 million baht in cash. The company will also approach other creditors such as suppliers to participate in its rehabilitation plan, chief executive officer Win Viriyaprapaikit said on Sept 21.

The biggest Thai default post-1997
Sahaviriya Steel Industries Plc, the Bangkok-based operator of Southeast Asia’s largest flat-steel manufacturing complex, reneged on 50 billion baht ($1.4 billion) of loans Monday following the failure of its four-year old UK venture. The group said it was suspending production at the Teesside plant, which employs about 2,000 people, amid a drop in prices and a supply glut stemming from slowing economic growth in China. The steel company’s market value dropped to 2.25 billion baht from as high as 51 billion baht in 2004, according to data compiled by Bloomberg.

Thailand’s biggest default since Thai Petrochemical Industry Plc buckled under $3.8 billion of liabilities during the 1997 Asian crisis has knocked earnings at Siam Commercial Bank, Krung Thai Bank and Tisco Financial Group, which combined had extended most of the credit utilised by Sahaviriya. As they negotiate a restructuring, the three leading creditors to the company will take a hit to their current quarterly earnings that could reduce profitability dramatically.

Sahaviriya Steel overinvested in the UK and steel prices went down continuously from there, and they used too much debt because they could not issue enough equity and bonds at that time. Now they have to find new partners to survive. Sahaviriya Steel partly blames an economic slowdown at home, with consumer confidence declining for an eighth consecutive month in August, as well as a global steel glut caused by China dumping vast quantities of the alloy. Prices for rebar in China, the reinforced steel used in construction, have slumped 63%c from a May 2008 all-time high to their lowest since 2003 as local producers flooded the market with record exports, abetting some of the 11 large steel bankruptcies worldwide since 1998.

Difficult times ahead
Should all of Sahaviriya Steel’s debt become non-performing, bad loans in the banking system will rise to 2.86% of total advances, from 2.46%, and a level of 2.86% would be the highest since July 2011.

Thai Rating & Information used to rate Sahaviriya Steel at BB+, its highest non-investment grade. It withdrew the rating in October 2011 at the company’s request.

In this age of low steel prices due to Chinese exports, large, efficient mills and high pollution standards, it is very difficult for mills like Teesside to exist, and reduced auto production in the UK also crimped demand.

Provisions for doubtful recoveries
Siam Commercial Bank will make an extra 10-11 billion baht of provisions to account for the bad Sahaviriya Steel debt, and aims to minimise that blow this quarter by realising 7-8 billion baht of investment gains, it said in a Sept 21 exchange filing.

Krung Thai Bank will allocate another 9 billion baht in addition to the money it has already set aside, and expects to take a 6-billion-baht hit on net profit in the three months to Sept 30, about 70% of what its earnings have averaged every quarter since 2013.

Tisco will make an extra provision of 1.4-1.5 billion baht, an amount that could almost wipe out its earnings this quarter.

How did KRIS fare?
Let us take a look at the Kamakura Default Probabilities (KDPs) generated by KRIS one year before the default event, and then compare that to the KDPs generated on the eve of the default.

As can be clearly seen, there is an upward movement in the KDPs from September through to December 2014, and this trend further continues through 2015.

By the time we get to June 2015, the writing is on the wall, and the KDPs have now reached an astounding 12%.

The year-on-year comparison reveals a clear deterioration in Sahaviriya’s creditworthiness, and this is evidenced through an uptick in all KRIS models.

A comparison of all models in KRIS shows a similar, disconcerting pattern that augurs ill for the organisation’s survival capabilities.

The credit spreads too, had moved adversely, from a low of 1% to a high of close to 10%.

The term structure of default too, shows some disturbing trends, with a significant upward movement in KDP term structures when compared to 2014.

The implied ratings provided by KRIS in 2014 clearly shows a deterioration, and the predictive trends showcase a downward movement envisaged in ratings:

A comparison of Sahaviriya to the industry peers clearly showcases the troubling fact that it has lost ground and that it is well afield of the upper bounds of riskiness imposed through the volatilities in the sector.

Sahaviriya Steel is a great example of the innate predictive power of the KRIS models, and users with such a solution in their hands can take exit decisions on risky exposures earlier than others. Default probabilities provide insight into both individual company risks as well as industry or country risks based on concentrations of firms with high absolute default probabilities or those experiencing rapid deterioration. Further insight can be gleaned from examining default probabilities over along the term structure. This provides a quick way to develop a watch list requiring further fundamental analysis to determine an appropriate action plan to guard against risk in a portfolio.

About Kamakura Corporation
Founded in 1990, Honolulu-based Kamakura Corporation is a leading provider of risk management information, processing and software. Kamakura was named to the World Finance 100 by the Editor and readers of World Finance magazine in 2012. In 2010, Kamakura was the only vendor to win 2 Credit Magazine innovation awards. Kamakura Risk Manager, first sold commercially in 1993 and now in version 8.1, is the first enterprise risk management system with users focused on credit risk, asset and liability management, market risk, stress testing, liquidity risk, counterparty credit risk, and capital allocation from a single software solution. The KRIS public firm default service was launched in 2002. The KRIS sovereign default service , the world’s first, was launched in 2008, and the KRIS non-public firm default service was offered beginning in 2011. Kamakura added its U.S. Bank default probability service in 2014. Kamakura has served more than 330 clients ranging in size from $1.5 billion to $1.6 trillion in assets. Kamakura’s risk management products are currently used in 43 countries, including the United States, Canada, Germany, the Netherlands, France, Austria, Switzerland, the United Kingdom, Russia, the Ukraine, Eastern Europe, the Middle East, Africa, South America, Australia, Japan, China, Korea, India and many other countries in Asia.

Kamakura has world-wide alliances with Fiserv ( and SCSK Corporation ( making Kamakura products available in almost every major city around the globe.

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