Saab’s battle for survival ends in a journey to the scrap yard
After 64 years manufacturing automobiles and nine months battling for survival, a court declared Saab bankrupt last week. The ruling put an end to the venerable automaker’s long struggle to generate enough sales volume in the already-crowded European car market to cover its costs. That became a fight for its existence after former owner General Motors decided to unload the business in 2009. But Saab’s new Dutch owners, Swedish Automobile, found it impossible to generate a profit by 2012, as they had publicly declared was their intent. Instead, Saab ran out of cash, leaving workers unpaid and forcing the shutdown of production in April. A last-ditch effort at a rescue of Saab, involving Zhejiang Youngman Lotus Automobile, withered when GM refused to license Saab technology to a potential rival in the lucrative Chinese automotive market.
Now that the verdict is in, and the liquidation of Saab’s assets seems likely to be the next and final stage in the company’s lifecycle, it’s time for postmortems. One of the key questions up for debate is whether there were any early warning signs that Saab’s battle seemed likely to end in the bankruptcy ruling. According to Thomson Reuters analysts using the StarMine Structural Credit Risk Model (SCR), the answer is unequivocally “yes”. This credit risk model has shown itself to be highly predictive of deterioration in a company’s credit quality and increase in its credit risk, as well as an effective way of gauging bankruptcy risk associated with any particular company. As illustrated in the chart below, this systematic measure reveals that the credit risk of Saab’s parent company deteriorated back in May, long before it abandoned rescue efforts.
Taken from Thomson Reuters CreditViews, available within Eikon, the chart above captures the StarMine Implied Rating and the StarMine Structural Model Industry Rank for Saab’s parent, Swedish Automobile, for the last two years. The StarMine Implied Rating (represented by the red line) maps the probability of default on the part of Swedish Automobile against an equivalent credit agency rating. Here, we see it deteriorating and heading downward toward its recent rating of CC. The Industry Rank (shown in blue) gauges the company’s probability of default (based on the Structural Component of the StarMine Credit Risk Model) over the coming 12 months and then awards a percentile ranking from 1 to 100. The lower a company’s score, the greater the risk it will default on its debt obligations or resort to filing for bankruptcy within the coming year. In the case of Swedish Automobile, that ranking was in the single digits throughout much of the two-year period surveyed.
The table below helps to set Saab’s parent company among its peers. The companies listed here are Swedish Automobile’s fellow members of the European automotive industry (represented by the Thomson Reuters Business Classification (TRBC) Automobiles & Auto Parts within Developed Europe). When the model’s calculation of default probability is used to rank these businesses, and the results are presented in descending order with the company most likely to default at the top, Saab is clearly the leader. Not far behind, however, is Eybl International, an Austrian components maker. With Saab now exiting the picture, it moves up to the top spot, a dubious honor and potentially an ominous sign for the firm. Certainly, it makes it worthwhile for investors to keep their eyes on what developments involving that company in the weeks and months to come.
Further down the list is Italian automaker Fiat. While Italy itself may have aroused concern among investors worldwide, Fiat itself still displays more solid fundamentals than does SAAB. Still, using the StarMine credit models, the company shows signs of credit weakness. As can be seen in the chart below, the StarMine Implied Rating (represented by the red line below) recently fell significantly below the rating agencies’ assessment of the company’s credit risk. A few weeks after that StarMine score began to slide, Fitch followed suit, cutting its rating on Fiat’s debt to BB from BB+. It seems as if investor hopes that sales of the new Fiat 500 in the United States would improve the company’s financial positions haven’t yet borne fruit, or that Italy’s economic problems are taking such a heavy toll on the company’s domestic sales that any success in the US market becomes moot.
The European automakers, as a group, certainly deserve careful monitoring as both the industry and the region undergo a shakeup.
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