5.If the debt has special features such as collateral or a bona fide guarantor, the
rating is adjusted accordingly.For relative value analysis, the corresponding U.S. corporates’ credit spread is
added to the sovereign bond’s option adjusted spread. Only a handful of the Mexican
companies are rated by the rating agencies. Thus the risk assessments such as those
provided by EMS are often the only reliable indicators of credit risk to overseas in-
vestors in Mexico. The author reports that the ratings have proven accurate in antic-
ipating both downgrades and defaults (e.g., Grupo Synkro in May 1995) and up-
grades.
10.22 URUGUAY
(a) Pascale (1988). The economic situation in Uruguay had gone through a major
transformation, starting from a period of deep economic intervention during the pe-
riod 1950–1974 that led to high inflation, low real growth and frequent balance of
payments crises. Starting in 1974 there was gradual reduction in the controls for cap-
ital flows, government intervention in economic affairs was reduced, and a new tax
policy implemented. The change in the economic environment provided a new set of
shocks to Uruguayan firms. They had to face new market conditions and decreased
protection. It is in this setting that this model was developed to predict financial prob-
lems in firms.
The sample consisted of 44 failed firms (FP’s; Financial Problems), and 41 healthy
firms (NPs; No problems). The criterion for failure was any one of the following: liq-
uidation, bankruptcy, (forbearance/restructuring) agreement with creditors, arrange-
ments with bank syndicates or other financial backers which did not always involve
special formalities but entailed substantial changes in financial structure, and cessation
of activities owing to financial problems. The firms were in food, beverage, footwear
and apparel, leather, chemical, and metal products. All the firms selected had no less
than 10 workers each, with most firms (both failed and healthy) employing 50 or more
workers. Healthy firms were matched with failures based on size and industry, al-
though an exact correspondence was not always possible due to lack of data. Both
groups of firms were studied for the period from 1978 to 1982. Of the firms with prob-
lems, 77% experienced their difficulties in 1980 and 1981, and 11% in 1982.
The adjustments performed on the sample data are worth mentioning because nor-
mally nominal values of the ratios are used in such studies rather than those based on
constant term or inflation-adjusted financials:
- The data was cross-checked with published reports.
- All amounts were restated in a common currency.
- Fixed assets were valued in accordance with tax regulations.
- Current assets and liabilities in local currency were deflated by the wholesale
price index applicable to the industry. - Investments other than fixed assets were deflated using the general consumer
price index. - Fixed assets were computed at their value for tax purposes for the first year of
data. In subsequent years the adjustments to the value were deflated by the im-
plicit price index for fixed gross investment.
10 • 44 BUSINESS FAILURE CLASSIFICATION MODELS