Payment Scores Miss Bankruptcy, While the FRISK® Score Predicts It

Payment Scores Miss Bankruptcy, While the FRISK® Score Predicts It

During a long economic expansion it's easy to dismiss financial risk, particularly when most companies are paying their bills on time. However, public companies usually hide financial distress with their prompt payment behavior. The truth is that corporate debt levels are higher than ever and it’s important to have your company’s risk department prepare now.

Instead of looking into the past with payment history, you need to be looking forward with CreditRiskMonitor’s predictive financial risk analytics.

Payment Data Fails

CreditRiskMonitor research shows that public companies, which account for the largest amount of dollar exposure, often pay on time right up to the point of bankruptcy. This behavior will make certain financial health scores appear strong, but it actually disguises risk.

In 2012, Dun & Bradstreet labeled this phenomenon in a white paper as the "cloaking effect.” Their report, aptly titled "Bankruptcy: Why the Surprise," explained to D&B customers why its payment-based PAYDEX® score failed to highlight bankruptcy risk. D&B admitted that payment data isn't "...singularly or collectively sufficient to perform the credit analysis needed."

CreditRiskMonitor's data confirms D&B's research on this matter. The table below compares the payment based DBT Index, which is similar to the PAYDEX® score, to CreditRiskMonitor’s proprietary FRISK® score that predicts bankruptcy risk with 96% accuracy:

YearBankrupt CompanyDBT IndexFRISK® Score
2019Hexion Inc.91
2018Sears Holdings Company91
2017Toys 'R' Us, Inc.91

 

CreditRiskMonitor's historical FRISK® scorecard shows these situations are not unique. Each of these companies, and many more over the last three years, kept paying on time until they declared bankruptcy. CreditRiskMonitor's FRISK® score has correctly pinpointed the risk that payment data has otherwise missed.

The FRISK® score uses a "1" (highest risk) to "10" (least risk) scale and typically provides 12 months of advanced notice. Therefore, CreditRiskMonitor subscribers are not surprised by bankruptcies, they are forewarned. Any company in the lower half of the range, called the "red zone," should be closely monitored.

FRISK® score Breakdown Chart

More Risky Business

The FRISK® score's historical success provides our company the requisite statistics to show how we’re the most accurate service in the marketplace, but the past is the past: what matters most to us is helping you steer clear of future bankruptcies – seeing danger where it’s going to be in 2020, 2021 and beyond, not just where it is today. CreditRiskMonitor estimates that losses on public companies will surpass $1.1 trillion during the next economic downturn. As a small sample, here are four companies that commercial counterparties should be monitoring closely today:

CompanyIndustryDBT IndexFRISK® Score
J. C. Penney Company, Inc.Retail - Department and Discount81
Eastman Kodak CompanyPrinting Services91
YRC Worldwide Inc.Trucking92
Hovnanian Enterprises, Inc.Construction Services91

 

These are only a handful of financially distressed companies in the U.S. today and around the world.

Don't Be "Surprised", Be Informed

The few situations noted above are examples of how payment data fails to identify financial risk. These are not unusual situations, in fact, they happen quite often. Instead, use predictive scoring and analysis. That’s why more than 35% of the Fortune 1000 rely on CreditRiskMonitor to mitigate public company bankruptcy risk. Consider using the 96% accurate FRISK® score as a part of your risk management strategy before you are "surprised" by unreliable payment data.

About CreditRiskMonitor

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 $150 billion in trade data on their counterparties every month, giving them visibility into their biggest dollar risks.