Seven Dangerous Myths About Public Company Risk
Credit management professionals are responsible for knowing their credit portfolios through and through. Yet many credit professionals underestimate the public company risk in their portfolios.
With debt loads and economic uncertainty higher than ever, you could be more exposed than you think. Let’s debunk some common misconceptions.
Myth 1: Public companies don’t fail often, so I should focus on monitoring my private counterparties
While it’s true that fewer public companies fail overall, when they do, the impact can be devastating. That’s why public company dollar risk needs to be monitored closely.
- Public company bankruptcy risk is actually up 32% since the beginning of the Great Recession
- A staggering 90% of all companies surveyed said a downturn in capital markets and economic conditions are cause for financial risk, making a strong portfolio vital to company health
- Non Investment grade companies issue more than 50% of all corporate debt
What’s more, many smaller public companies are unrated altogether, making it hard to assess risk.
Myth 2: I’m not exposed to troubled industries, so my public company risk is relatively low
Plenty of healthy companies reside in troubled business sectors, just as risky companies are found in thriving industries. For instance, we may not be surprised to hear that a brick-and-mortar retailer like Gordmans Stores or an energy company like Vanguard Natural Resources, LLC fails, but what about a medical and surgical supplier like recently bankrupt Unilife Corp.?
Headlines only provide a small snippet of the full story, making it essential that you understand your public company risk exposure -- regardless of industry -- before critical customers or suppliers get into trouble. Otherwise, financial distress can be imminent.
Myth 3: Public companies aren’t my customers
It may seem that way at a glance, but if you look closer, you’re likely to discover that public company risk is more pervasive in your portfolio than you thought.
For instance, when credit managers assess risk, many are shocked to learn that public companies make up a big portion of their portfolio. Our customers, for example, actually have an average 53% of their dollar risk exposure to public companies. For some, the exposure can be as high as 80%.
Corporate structures can be highly complex, with parent and child companies listed under different names. Subsidiary and subsidiary guarantor relationships are often veiled and unclear.
The bottom line? It’s the dollars at risk that matter most, not the number of companies.
Myth 4: Supply chain financial risk is no big deal
Supply chains are another potential blind spot putting your operation -- and your bottom line -- at risk. In fact, 25% of companies suffered supply disruption due to the financial stress of a critical public company supplier.
These critical suppliers are vital to a company’s ability to operate so disruption for them could mean disruption for you.
When Hanjin Shipping filed for bankruptcy, it jeopardized the flow of holiday goods for a critical selling season, for companies from apparel and electronics to toys. The bankruptcy of Westinghouse Electric drove that lesson home, with 9 billion dollars in liabilities. This public company failure will set off a costly chain reaction of loss and disruption for several Southern utilities, and many other counterparties.
Today, vetting critical supplier financial risk is just as important as judging customer creditworthiness.
Myth 5: Public company financial data is so easy to gather, I may as well do it myself
Theoretically, it is possible to gather all the public company financial data necessary to analyze risk, but doing so is not the best use of credit department resources. In general, most departments are already spread thin, which could result in missed information.
For instance, spreading financials for credit analysis is a manual task that can consume many hours. This task, which is merely collating and standardizing the data, is only a piece of the process. If you have hundreds of companies with quarterly statements to assess, you’re looking at a serious time commitment.
In today’s lean business world, automating a tedious manual process can free up time to focus on higher value activities and deliver better results. Gathering financials for credit decisions is a time consuming process when handled manually, and it could cost your company money.
Myth 6: I can use payment history to understand a public company’s financial health
Many credit professionals think payment data highlights a public company’s financial health, but this misconception can cause a lot of damage for a public company.
For private companies, trade payment history can, and does, indicate a future ability to pay. However, data shows that this same metric fails to predict financial distress for public companies. The difference lies in a public company’s access to capital and financing. With this access, public companies can – and do – pay on time, often right up until filing Chapter 11, rendering their payment history irrelevant when assessing financial risk. Payment history can make your public customers appear to be quite healthy when in reality, they are in financial trouble.
Myth 7: All Third-Party Credit Risk Scoring Models Are Alike
Education is the best way to determine which tool will best measure a public company’s credit risk. Ensure you and your team have a deep understanding of the various options and the risk model they are based on.
The FRISK® financial risk score warns of public company risk as it develops. It’s recalculated daily, and considers the financial metrics needed for an accurate assessment -- financial statement trends and ratios, market cap changes, bond rating upgrades and downgrades, and a proprietary activity score that captures the sentiment of an elite group of credit managers.
Public company risk is like a dangerous iceberg lurking under the water, which means understanding and educating your team is vital to keeping your company afloat.
CreditRiskMonitor is a financial news and analysis service designed to help professionals stay ahead of public company risk quickly, accurately and cost-effectively. More than 35% of the Fortune 1000, plus thousands more worldwide, rely on our commercial credit reporting and predictive risk analytics for assessing the financial stability of more than 56,000 global public companies.
At the core of CreditRiskMonitor’s service is its 96%-accurate FRISK® score, which is formulated to predict public company bankruptcy risk. One of four key components calculated in the FRISK® score is crowdsourced subscriber activity. This unique system tracks subscribers' patterns of research activity, capturing and aggregating the real-time concerns of what are essentially the key gatekeepers of corporate credit. Other features of CreditRiskMonitor’s service include timely news alerts, the Altman Z”-Score, agency ratings, financial ratios and trends. CreditRiskMonitor’s network of trade contributors provides more than $140 billion in trade data on their counterparties every month, giving them visibility into their biggest dollar risks.