190 - Modelling Industry-level Ccorporate Credit Risk for the Netherlands

DNB Working Papers
Publicatiedatum 11 december 2008

This paper examines corporate credit risks in the Netherlands at the industry-level, addressing two key questions. First, to what extent are corporate credit risks driven by idiosyncratic financial factors or systematic macroeconomic factors? Second, did debt financing in the late 1990s indeed push a large number of firms into bankruptcy in the subsequent years? To this end, bankruptcy rates are regressed on a number of industry-specific financial ratio’s and macroeconomic variables in a panel-regression framework covering six industries from 1992 to 2005. I find that an industry’s bankruptcy rate rises with an increase in leverage and a decrease in profitability and liquidity. Adding macroeconomic variables shows that lower GDP growth, higher interest rates, and an appreciating currency raise credit risks. Applying a model with parameter heterogeneity illustrates that systematic factors primarily account for the overall rise in bankruptcy rates between 2000 and 2003, but that idiosyncratic factors dominate in the worst-affected industries. This includes the IT industry where the build-up of debt was most pronounced and compounded losses.