Mid-market companies in good financial health
The credit quality of Australia's mid-market corporate sector improved markedly in 2015, with the mining, transport and construction sectors stable and the average probability of default among mid-market companies less than two per cent.Veda Credit Ratings has released its inaugural Mid Market Risk Index, measuring the financial health of companies with annual revenue of A$10 million or more, based on their credit ratings.Veda has assigned an aggregate rating of 98.5 to the sector, an increase from 96 in 2014. The rating is measured against a base year of 2005, when the measurement was started.Companies in the index were given a score of 100 in 2005, which broadly equated to an average credit rating of BB-. A rating of 95 indicates a probability of default of more than five per cent. Australian mid-market companies fell below 95 on Veda's index from 2008 to 2012.The rating is based on 9500 assessments a year drawn from a universe of 30,000 company credit ratings.There are some surprises in the report. Veda head of ratings services Brad Walters said the mining outlook was stable, despite commodity price pressures, because export volumes were rising and the lower exchange rate was supporting local earnings.The construction industry is also stable, with order books bolstered by infrastructure and residential projects. Walters said the prospect of a fall in residential construction activity was a risk factor.Another surprise is that the outlook for the healthcare industry is deteriorating. The industry has seen high demand but margins are contracting due to the freezing of indexation rates on fees. Another problem for the industry is that it must invest heavily in new technology, which is likely to see leverage increase.Manufacturing faces a negative outlook because of rising input costs; the lower dollar has caused the price of imported materials to rise.