Assessing financiers’ default risk: Evidence from Finnish CapEx-heavy startups

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Journal Title

Journal ISSN

Volume Title

School of Business | Master's thesis

Authors

Date

2022

Department

Rahoituksen laitos

Major/Subject

Mcode

Degree programme

Finance

Language

en

Pages

171 + 19

Series

Abstract

This thesis affiliates to the growing body of default research by forming a coherent picture of default risks in capital expenditure intensive, or CapEx-heavy, startup financing. The core of our research is built on the field of credit risk as we present historical default and recovery rates as well as analyse factors influencing probability of default and recovery rate. Moreover, we augment the quantitative research with findings from expert interviews, case study, and legal documents. In addition to academic contribution, our research includes information relevant to financiers, including but not restricted to Ilmastorahasto (Eng. The Finnish Climate Fund) – a government-owned fund that also commissioned this thesis. The findings help financiers better assess the riskiness of financing CapEx-heavy startups. Ideally, this supports investments into CapEx-heavy targets with environmental benefits, both by the public and the private sector. Our research enriches the current body of research in terms of its data gathering method. Instead of relying on data from a financier, or of public companies, we filter Finnish CapEx-heavy startups from the population of all Finnish companies using a data set from Asiakastieto, a provider of business and consumer information. In addition, we fetch data from documents provided by the Office of Bankruptcy Ombudsman. Consequently, our research may be of use to regulators in terms of assessing the riskiness of CapEx-heavy startups and optimizing legislation accordingly. Finland has been ranked the best country in the world in resolving insolvencies by the World Bank (2022) – we hope that this research helps keeping the country exemplary. When it comes to methodologies, we simply compile statistics to present historical rates. To analyse factors influencing probability of default and recovery rate, we use logistic and ordinary least squares regressions. The expert and case study interviews are held in a semi-structured manner. We find that when CapEx-heavy startups conduct their first significant investments in tangible assets, the default rates are the highest in the first years following the investments. Taking an annual perspective 2008-2020, we find the average default rate to stand at 1.9% (weighted at 1.4%), which is higher than for all CapEx-heavy companies. We analyse factors influencing probability of default with variables proposed by Altman & Sabato (2007), combined with a macroeconomic factor. The results give some support to the model, but we cannot confirm its optimality. As for the firm recovery rate, we find the mean (median) value of 16.7% (10.7%) in 2013-2022, with large differences between credit classes. We also present the distributions of recovery rates, showing right-skewed and bimodal results. Lastly, we analyse whether firm, bankruptcy procedure, securitisation, and macroeconomic characteristic factors influence recovery rates and find results that are primarily in line with previous research carried out with more diverse data. When considering variables specific to CapEx-heaviness, we find that increasing the amount of tangible assets in an already CapEx-heavy firm may decrease the recovery rate.

Description

Thesis advisor

Joenväärä, Juha

Keywords

startup, capital expenditure, default, bankruptcy, probability of default, recovery rate

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Citation

Permanent link to this item

https://urn.fi/URN:NBN:fi:aalto-202301221456

Collections

[gradu] Kauppakorkeakoulu / BIZ