When One Risk Leads to Another: Lessons from a Bankruptcy Case Study
It’s no secret that bricks-and-mortar retail is under siege.
On the heels of a disastrous 2016, the first five weeks of 2017 has followed with four more retailer bankruptcies. And just last week, the WSJ reported that as a result of systemic distress, mall owners are walking away from distressed properties.
Fact is, an industry in crisis can create a cascade of risk, impacting many companies, both directly and indirectly.
Case in point: After sports apparel retailer Sports Authority failed, one of their large suppliers, Performance Sports Group, Ltd., failed as well. A look at the list of PSG's unsecured creditors shows many other companies that were affected in turn.
A study of this bankruptcy case study holds valuable lessons for us all.
The Performance Sports bankruptcy: could creditors have seen it coming?
In the case of Performance Sports Group, the failure of a big customer -- Sports Authority -- triggered a series of events that led to bankruptcy. But while PSG ultimately fell victim to the loss of one big customer, they were showing many worrisome signs of financial distress beforehand.
Let’s take a closer look at how PSG’s financial struggles unfolded:
- As far back as Q3 2015, PSG revenue and EBITDA declined, with net losses for four out of the last five quarters
- The company’s A/R grew to 152% of sales,and the cash conversion cycle slowed dramatically over four quarters
- Net debt, weak cash and quick ratios, deteriorating interest coverage ratios and other metrics were alarms that liquidity might be insufficient to service debt and meet obligations
- Multiple agency debt rating downgrades (Moody’s and S&P)
- The FRISK® score falling deeper and deeper into the ‘red zone’, from a ‘5’ to a ‘1’ over the course of 2016.
Turns out, a strategy to diversify and expand via a series of ambitious acquisitions created a debt load that would have been a challenge to service, even in the best business case. This crushing debt load, in combination with the loss of several big customers, left a big hole in revenue, profitability and cash -- and created other financial stresses that PSG simply couldn’t overcome.
To see the timeline of events that led to the Performance Sports business failure, and all the warning signs of the company’s deteriorating finances, download our complete post-bankruptcy analysis.
What does the Performance Sports bankruptcy teach us?
First, watch your exposure to the troubled retail sector very closely. As we saw with the PSG bankruptcy, financial distress in one troubled sector can set off a chain reaction that may expose your company indirectly. Monitor credit risk across all your counterparties.
Also, make sure you have a process to spot financial distress early -- which would have been essential for PSG’s counterparties. A list of their unsecured creditors lists exposure in the millions, but this company had been in trouble for awhile, and as the bankruptcy case study shows, the early warning signs of growing risk were there for all to see.
Bottom line: Each new bankruptcy can cause a chain of risk exposure. That's why it's essential to detect growing risk in your credit portfolio before a large bankruptcy impacts one of your counterparties. Advance warning of deteriorating financial health allows you to take steps to mitigate risk in time to avert loss.
Are you missing big credit risks in your portfolio?
As our friends at Credit Today point out in their recent process automation study, spotting risk early isn’t that difficult if you have the right tools in place.
To save time, make sure that you are using technology that:
- Aggregates up-to-date financial data from multiples sources -- including agency ratings, SEC filings, market data, and more
- Calculates a predictive financial risk score, that provides an advanced warning of bankruptcy
- Lets you drill down further, with sequential quarters of financials and ratios already calculated and spread for easy analysis
- Tracks key A/R metrics and delivers custom reports with useful insights from your trade data
- Monitors all the companies in your portfolio, and alerts you as financial risks change.
Learn to spot growing risks long before the next bankruptcy hits: Download the Performance Sports Bankruptcy Case Study.
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.