The FHR in Action: Exela Technologies
The FHR is not only an indicator of the default risk of a company. It is also a measure of the firm’s efficiency, competitiveness, and operational resilience. Companies with weak financial health often don’t have the capacity to invest in critical components of their operations, such as preventative maintenance on factory equipment, quality assurance programs, and cybersecurity infrastructure.
Our studies have shown that companies with weak financial health are 2.0x more likely to have issues with quality and 2.6x more likely to have issues with delivery. Both of which can lead to costly disruptions to their customers’ operations.
Case in point – Exela Technologies. In February 2024, Aflac sued Exela to get its money back from a support services vendor that was hit by a ransomware hack attack in June 2022. After the attack, Aflac was unable to use key software involved with claim processing and estimates that they spent $355,927 to cope with the disruption and wants Exela to refund $875,500 in support services fees.
At the time of the ransomware attack on Exela, their FHR was 27, High Risk, on our 100-point scale.
Six months after the ransomware attack, in January 2023, Exela missed interest payments on first-priority senior secured notes. While they made these missed interest payments within the 30-day grace period, Exela continues to struggle with negative profits and cash flow, high leverage, and extremely low liquidity. Since the ransomware attack in June 2022, Exela’s FHR has fallen another five points to 22, getting dangerously close to the High Risk zone.
According to our latest Annual Default Review, over the last five years, 92% of US industrial public companies that defaulted were rated High or Very High Risk at the time of default.
According to feedback from our clients, credit scores based on trade payment data, versus full and complete financial statements like the FHR, had not classified Exela as a high risk business partner.
Research shows that while there are many scenarios where a company may experience late trade payments, rarely does it involve customers at risk of failure. There is a very low level of correlation between trade payment delinquency and a company’s true financial health. Firms with poor financial health can pay on time, and firms with strong financial health can pay late.
While other risk providers missed it, we did not. Risk assessments that are reliant on flimsy risk markers, such as trade payment data, are missing the full story. RapidRatings leverages the most reliable risk indicator on the market: financial statements. This allowed us to identify Exela's decline when others did not, giving our clients time to protect themselves.
For risk managers, Exela's story is a clear message: financial health is the ultimate indicator of future distress. Companies prioritizing sound risk management with financial health as a core principle are better equipped to navigate evolving risks and avoid disruptions.
