August 2014 - WAIN Street

Taking the Pulse
August 2014
Business credit quality starts h2 2014 on strong note
Business Default Index at 6.98% (↓0.11%)
Diffusion Index at 49.9 (↑0.4)
The WAIN Street Business Default Index (BDX) posted a 0.11% improvement in July to
start the second half of the year at 6.98%—its best reading since index inception in
December 2009. The associated Diffusion Index edged up slightly to close at 49.9.
Overall declining default rates and stable diffusion values point to decrease in losses
incurred by lenders. Credit performance of smaller businesses continues to improve
while that of larger businesses has steadied near index lifetime lows. Solos—businesses
with no paid employees—present lenders an attractive segment for building new business
credit portfolios. The superior credit performance of E20s—businesses with fewer than
20 employees—presents lenders an opportunity to grow their portfolios.
At a Glance
% Point Change
Index
BDX
Diffusion
July
2014
3-month
moving
average
June
2014
July
2013
3-month
moving
average
1-month
The default index is quoted as a
seasonally adjusted, annualized
default rate. An increase in the
index corresponds to deterioration
in business credit quality.
The diffusion index measures the
degree to which a change in
default rate is spread throughout
businesses. A diffusion value
greater than 50 corresponds to
more businesses deteriorating in
credit quality than improving.
12-month
6.98%
7.06%
7.09%
7.40%
-0.05%
-0.11%
-0.42%
49.9
52.2
49.5
48.5
-0.2
0.4
1.3
4.05%
4.16%
4.14%
4.55%
-0.06%
-0.09%
-0.50%
49.9
48.1
42.1
44.4
-0.3
7.9
5.5
5.65%
5.74%
5.72%
6.26%
-0.09%
-0.06%
-0.61%
Business-size based sub-indices
Solo
Diffusion
E20
Diffusion
E100
Diffusion
E100+
Diffusion
51.1
51.1
49.1
49.2
0.1
2.1
1.9
8.59%
8.70%
8.81%
9.08%
-0.03%
-0.22%
-0.49%
50.1
52.8
51.1
49.3
0.0
-1.0
0.8
9.40%
9.40%
9.45%
9.27%
0.05%
-0.05%
0.12%
50.4
52.8
50.9
49.8
0.0
-0.5
0.6
Table of contents
Business Default Index
Solo sub-index
E20 sub-index
E100 sub-index
E100+ sub-index
Methodology
Performance
Index definitions
BDX
2
3
4
5
6
7
8
100.0%
All businesses
Solo
10.1%
Businesses without paid employees
E20
13.2%
Businesses with 1 to 19 employees
E100
13.0%
Businesses with 20 to 99 employees
E100+
Chart 1: Monthly default rates for the BDX and business-size based sub-indices.
© 2014 WAIN Street, LLC. All rights reserved.
63.7%
Businesses with 100 or more employees
Business Default Index
Taking the Pulse
August 2014
Tracks defaults across all businesses
Default rate
Diffusion value
July 2014
6.98% (↓0.11%)
49.9 (↑0.4)
Q3 2014 (QTD)
6.98% (↓0.13%)
49.9 (↓2.5)
2014 (YTD)
7.18% (↓0.24%)
51.3 (↑0.8)
Chart 2: Monthly default rate.
Chart 3: Monthly default rate change and diffusion margin.
Map 1: State default rate rankings based on 3-month moving average.
Default rates are at their index lifetime lows and
business credit performance is stronger than
before the Great Recession.

LA, SD, AK, VA, and MT businesses lead with
default rates less than one-half the national
rate. NV, AZ, IL, CA, and DC default rates are
over one and one-half times the national rate.

NJ and WA businesses posted the biggest
improvement in default rate of over 1%. MA,
NV, and RI default rate suffered deterioration
of more than 0.5% in the last three months.

Manufacturing sector default rate is lowest at
3.2%. Management of companies, Utilities,
and Education services sector default rate is
highest and more than one and one-half times
the national rate.

In the last three months, Education services,
Retail trade and Construction sector default
rate improved by over 0.5%. In the same
period, Mining sector businesses suffered the
biggest deterioration of over 2.5%.
Map 2: Industry sector default rate rankings based on 3-month moving average.
2
Taking the Pulse
Solo Sub-Index
August 2014
Tracks businesses without paid employees
Default rate
Diffusion value
July 2014
4.05% (↓0.09%)
49.9 (↑7.9)
Q3 2014 (QTD)
4.05% (↓0.17%)
49.9 (↑1.5)
2014 (YTD)
4.27% (↓0.32%)
49.1 (↓0.2)
Chart 4: Monthly default rate.
Chart 5: Monthly default rate change and diffusion margin.
Map 3: State default rate rankings based on 3-month moving average.
Consistent decrease in segment default rate and
continuing firm-level improvement in credit
performance provide lenders an opportunity to
build new business credit portfolios.

LA, AK, SD, and VA businesses lead with default
rates less than one-half the national rate. NV
and AZ default rate is nearly twice the national
rate.

ND and SD business default rate deteriorated
by nearly 0.2% in the last three months. AZ,
SC, TX and MS businesses posted default rate
improvements of over 0.5% in the same
period.

Utilities, Manufacturing, and Information
sector lead with default rates one third lower
than the national rate. Construction sector
business default rate is the worst and 0.8%
higher than the national rate.

In the last three months, default rates
improved across all industry sectors.
Education services businesses improved the
most with over 0.5% decrease in default rate.
Map 4: Industry sector default rate rankings based on 3-month moving average.
3
Taking the Pulse
E20 Sub-Index
August 2014
Tracks businesses with 1 to 19 employees
Default rate
Diffusion value
July 2014
5.65% (↓0.06%)
51.1 (↑2.1)
Q3 2014 (QTD)
5.65% (↓0.18%)
51.1 (↑0.2)
2014 (YTD)
5.91% (↓0.37%)
51.0 (↑0.5)
Chart 6: Monthly default rate.
Chart 7: Monthly default rate change and diffusion margin.
Map 5: State default rate rankings based on 3-month moving average.
Sustained decrease in segment default rate and
marginally increasing diffusion values indicate
lower firm-level losses incurred by lenders
presenting opportunities for extending more credit.

SD businesses lead with default rates nearly
one third the national rate. AK, LA, VA, and IA
default rate is less than half the national rate.
NV and AZ default rate is nearly twice the
national rate.

CT and NM businesses posted default rate
improvements of over 1% in the past three
months. In the same period, RI default rate
deteriorated by over 1%.

Utilities and Manufacturing sector lead with
default rates nearly one-half the national rate.
Management of companies and Construction
sector business default rate is nearly one and
one-half times the national rate.

In the last three months, Utilities and Real
estate sector default rate deteriorated slightly.
All other sectors posted improvements with
Finance & insurance sector businesses leading
with over 0.5% improvement.
Map 6: Industry sector default rate rankings based on 3-month moving average.
4
Taking the Pulse
E100 Sub-Index
August 2014
Tracks businesses with 20 to 99 employees
Default rate
Diffusion value
July 2014
8.59% (↓0.22%)
50.1 (↓1.0)
Q3 2014 (QTD)
8.59% (↓0.14%)
50.1 (↓2.7)
2014 (YTD)
8.80% (↓0.28%)
51.7 (↑0.8)
Chart 8: Monthly default rate.
Chart 9: Monthly default rate change and diffusion margin.
Map 7: State default rate rankings based on 3-month moving average.
Segment default rate continues to trend down.
Diffusion values near 50 suggest strengthening of
firm-level credit performance and room for easing
credit standards.

LA, SD, and VA business default rate is less
than half the national rate. NV, IL, AZ, CA, and
NY business default rate is more than one and
one-half times the national rate.

AZ, OR, NJ, and DE businesses posted default
rate improvements of over 1% in the past
three months. In the same period, RI default
rate deteriorated by over 3.5%.

Manufacturing and ‘Accommodation & Food
services‘ sector default rate is less than half
the national rate. Construction sector
business default rate is nearly two times the
national rate.

In the last three months, Utilities sector
default rate deteriorated by nearly 1%
whereas Educational services, Retail trade and
Information sector default rate posted
improvements of over 0.5%.
Map 8: Industry sector default rate rankings based on 3-month moving average.
5
Taking the Pulse
E100+ Sub-Index
August 2014
Tracks businesses with 100 or more employees
Default rate
Diffusion value
July 2014
9.40% (↓0.05%)
50.4 (↓0.5)
Q3 2014 (QTD)
9.40% (↑0.05%)
50.4 (↓2.4)
2014 (YTD)
9.39% (↑0.10%)
51.7 (↑1.0)
Chart 10: Monthly default rate.
Chart 11: Monthly default rate change and diffusion margin.
Map 9: State default rate rankings based on 3-month moving average.
Segment default rate has settled after achieving a
low of 9.05% in May 2013. Diffusion values near 50
suggest segment credit performance has
stabilized.

LA, AR, and VA business default rate is less
than one-half the national rate. IL, AZ, NV, and
CA business default rate is more than one and
one-half times the national rate.

NJ businesses posted the highest default rate
improvement of 2.8% over the last three
months. In the same period, MD, SD, and HI
default rate deteriorated by over 1.5%.

Manufacturing and ‘Accommodation & Food
services‘ sector default rate is less than half
the national rate. Educational services and
‘Professional, Scientific and Technical services’
sector business default rate is over two times
the national rate.

In the last three months, Mining sector default
rate deteriorated by over 5% whereas
‘Accommodation & Food services‘ and Retail
trade default rate posted the highest
improvement of greater than 0.25%.
Map 10: Industry sector default rate rankings based on 3-month moving average.
6
Taking the Pulse
August 2014
About the WAIN Street Business Default Index
The Business Default Index (BDX) is the first component of the WAIN Street Business Credit Health Index™ (BCH
Index). Every month, the BCH Index aggregates multiple micro-level indicators concerning nearly 30 million
businesses to reflect the holistic credit health of obligors nationwide.
Methodology
The BDX is based on the credit performance of a subset of nearly 18 million businesses that have been tracked by WAIN
Street for over 12 months. A weighted aggregate, the BDX reflects the incidence and severity of defaults.
Defaults arise whenever there is non-performance of an obligation. The BDX incorporates the spectrum of defaults –
delinquencies, charge-offs, and bankruptcies. Business-level defaults are pooled within demographic segments based on
industry, geography and employee size. Default events within a segment are aggregated using weights designed to reflect
default severity. Segments are assigned weights to reflect the economic impact of the businesses within the segment.
Index values are obtained as the weighted harmonic mean across segments.
The BDX is seasonally adjusted and quoted as an annualized rate.
The index inception date is December 31, 2009.
Industry coverage
Description
Agriculture, forestry, fishing and hunting
NAICS Code
11
Rail transportation
482
Postal service
491
Financial vehicles
525
Religious, grantmaking, civic, professional, and similar organizations
813
Private households
814
Public administration
92
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Taking the Pulse
August 2014
Performance of the Business Default Index
The Business Default Index is a gauge of the prevailing vitality of US businesses. Its validity and reliability can be ascertained
by examining its relationship to other macroeconomic and financial sector performance indicators.
Indicator
BDX Relationship
Strength
Economic Indicators
GDP
Leading indicator: 6 quarters
-0.29
ECRI Coincident Indicator
Leading indicator: 1 month
-0.32
Industrial Production Index
Leading indicator: 1 month
-0.38
ISM Non-Manufacturing Index
Leading indicator: 6 months
-0.11
Initial Jobless Claims
Leading indicator: 1 month
0.40
Gallup Job Creation Index
Leading Indicator: 1 month
-0.39
Consumer Confidence
Leading indicator: 7 months
-0.17
Case-Shiller Home Price Index
Leading indicator: 6 quarters
-0.29
BofA ML High Yield Spread
Leading indicator: 7 months
0.08
Banking Indicators
Loan Loss Reserves
Leading indicator: 1 quarter
0.45
Top 100 Commercial Banks
C&I Charge-off Rate
Leading indicator: 1 quarter
0.39
Lease Delinquency Rate
Leading indicator: 1 quarter
0.46
CRE Delinquency Rate
Leading indicator: 1 quarter
0.55
Other Commercial Banks
C&I Charge-off Rate
Leading indicator: 2 quarters
0.47
Lease Charge-off Rate
Leading indicator: 2 quarters
0.41
CRE Charge-off Rate
Leading indicator: 3 quarters
0.41
Table 1: Correlation between BDX and other indicators. The data are detrended using the Hodrick–Prescott filter.
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Taking the Pulse
August 2014
About WAIN Street
WAIN Street empowers credit markets to better serve middle-market and small business enterprises. By harnessing data
on nearly 30 million US businesses, the WAIN Street Business Credit Health Index™ (BCH Index) provides an aggregate view
of credit health trends with the ability to drill-down to granular demographic segments. The BCH Index is a platform that
enables consistent measurement of middle-market and small business credit portfolio quality. This facilitates coherent
industry-wide communication around portfolio credit risk and unlocks new opportunities.
Middle-market and small businesses account for over $1 trillion of aggregate credit exposure. The BCH Index and
complementary WAIN Street services facilitate discovery, more effective management, and pricing of risks and
opportunities that exist in this market. These capabilities create greater financing options for middle-market and small
businesses, enhance liquidity for lenders, and promote financial innovation to stimulate entrepreneurship and new job
creation in the US.
For more information:
Vidur Dhanda
Publisher
WAIN Street
[email protected]
413-303-9765
www.WAINStreet.com
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