Private companies are in better shape to borrow

The Federal Reserve’s latest “Beige Book” report on economic activity indicated that a third of the 12 Fed districts are seeing stronger loan demand from consumers and businesses. And recent data from Sageworks, a financial information company, shows that privately held companies have improved two financial metrics that are often predictors of default risk, suggesting these firms are in better shape to borrow than in the last few years.

The average debt-service-coverage ratio for private companies in Sageworks’ database is more than five — the highest it has been in more than five years, according to current data. Debt-service coverage shows a firm’s ongoing ability to repay principal and interest on loans, and it is calculated as EBITDA relative to the current portion of long-term debt and interest. 

Preliminary analysis of additional Sageworks data shows that the average private company’s total liabilities represent about 70 percent of total assets, a lower ratio than it has been over the last four years. Banks and other commercial lenders want this ratio, which gives a sense of the firm’s equity cushion, to be as low as possible. Total liabilities, on average, have represented 74 to 75 percent of total assets in recent years, according to Sageworks’ data.

Both metrics help predict the probability of default for a company, the percentage likelihood that it will be unable to meet its financial obligations over a certain time period. The two ratios are variables included in a 12-month probability of default model that Sageworks developed through its data-sharing relationships with many U.S. banks.

See the complete report on Sageworks’ data here.