Determinants of credit risk of distressed companies in Malaysia / Intan Suhayza Hamzah

The effect on economy of businesses and banks failure is excessive, especially to the parties who will bear the consequences such as shareholders, managers, and employees. Businesses and banks failure indicate that they are financially distress when they are unable to meet its financial obligations as at when due. Financial distress companies usually have higher credit risk than those companies who are not in distressed since credit risk is associated with the risk of inability of a counterparty to perform its obligations. In Malaysia, companies that are listed in Bursa Malaysia but in distressed state are listed in PNI 7 and GN3 lists. The aim of this study is to examine the determinants of credit risk of financially distressed companies in Malaysia by using financial ratios as suggested by Altman (1968) which are liquidity, leverage, profitability, and efficiency. The credit risk ratio is used to assess the factors that affecting company's financial stability. Financial data was collected from financial statements from 2010 to 2019 as part of a descriptive research design. Finding from this study states that credit risk of distressed companies in Malaysia is based on financial leverage, where the higher the debt, the higher the dependency of the firm to debt financing, thus lead to financial distress and liquidity level where even firms that have high ability to convert its assets into cash, they do not necessarily can cover their obligations as at due, leads to higher credit risk. The result of this study will be useful to managers and owners of the companies, existing and potential shareholders, and the Government on the matter of controlling, reducing, and avoiding the credit risk.