The downfall of Exela Technologies, a SaaS vendor, has been on our radar for quite some time. Back in March 2024, we highlighted Exela Technologies as a cautionary tale, demonstrating how the Financial Health Rating (FHR) can accurately predict financial distress. Since then, Exela's trajectory has continued in a downward spiral. A look into their FHR Report and Financial Dialogue offers an interesting story:
FHR
Exela’s Financial Health Rating (FHR) has been on a consistent downward trajectory, reflecting significant financial challenges. In 2016, the company was rated at 42, indicating Medium Risk. By 2017, it had fallen sharply into the High Risk category with a rating of 29. Since then, despite attempts to stabilize, Exela’s financial health has continued to erode, with its current rating stagnating at a troubling 25, firmly entrenched in the High Risk zone.
Historically, over 90% of companies that have filed for bankruptcy have been rated below 40.
Exela's 2022 strategy to reduce debt by divesting non-core assets failed to pay-off. According to the Balance Sheet on the FHR Report, as of September 2024, Exela's total assets have dropped significantly from $1.037 billion in December 2021 to $567 million. This decline is a stark indicator of the company's ongoing struggles.
Financial Dialogue
Exela's financial performance overall is concerning. The company's Financial Dialogue Report, as of September 2024, flagged multiple concerns across various financial metrics as seen below. The inclusion of a Going Concern Warning in the company's 10-Q filing further underscores the gravity of its situation.
On November 8, 2024, Exela was delisted from the NASDAQ, and two key dates loom on the horizon, which could potentially push Exela over the edge:
- January 15, 2025: A significant interest payment of $50 million is due, while the company currently has only $11 million in cash.
- June 17, 2025: A debt maturity of $26 million, further exacerbating the company's liquidity crisis.
With a High Risk FHR of 25, Exela’s estimated probability of default over the next one year is 5.6%. Exela's ongoing decline serves as a powerful testament to the predictive accuracy of the FHR. By leveraging financial statements as the primary risk indicator, RapidRatings was able to identify the company's deteriorating financial health well in advance of other risk assessment methods.
Risk managers should heed the lessons from Exela's case. By prioritizing financial health as a core component of risk management, organizations can proactively identify and mitigate potential risks, safeguarding their operational continuity and long-term success.
