Industries to Watch: Defense Coming Around Amid Turmoil

Less than two years ago, product and service providers in the defense industry were facing headwinds that looked to present huge obstacles to growth, or even continued solvency, for some companies. That seems to have changed pretty dramatically, as tensions in the Middle East and Eastern Europe appear unlikely to fade or even remain at current levels into 2015. Thus, like aerospace earlier this fall, the changed outlook on defense has landed the industry on NACM’s Industries to Watch list for positive reasons.

Z-Score bankruptcy prediction model creator Ed Altman, the Max L. Heine Professor of Finance at the New York University (NYU) Stern School of Business and director of research in credit and debt markets at the NYU Salomon Center for the Study of Financial Institutions, told NACM that defense contractors and their suppliers have not been affected as much as he predicted in a May 2013 edition of Industries to Watch. Then, the industry and suppliers downstream were threatened by the government spending sequester and overreaction from investors who saw government cuts coming for other reasons like military troop withdrawals. But with the Islamic State waging war in Iraq and Syria, instability remaining in other Middle Eastern nations like Egypt and the ongoing Ukraine-Russia border standoff, buzz words like “drawing down” are no longer bandied about as much as last year. 

“There are always new places in the world where wars break out that we (United States) are involved with,” said Altman. “We’re bringing troops home at the same time we are escalating other activities. So, defense has not suffered much even with last year’s cuts in Congress.”

Trade creditors were concerned, and with good reason, that mid-market defense players would have to lean much more heavily on B2B credit. That and potential insolvency isn’t as big an issue in the current landscape, according to Altman. Also less likely is potential for a spike in mergers within the defense contracting industry, which would have been apparent if a number of mid-market companies began to exhaust their cash positions. While due diligence continues to rule the day for granting credit to those tied to defense activity and spending, there is reason for credit managers to be more at ease heading into 2015 than there was in mid-2013.

- Brian Shappell, CBA, CICP, NACM staff writer

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