2021 Turning Points: AI-Driven PAYCE® Score Delivers Crucial Early Warnings on Private Bankruptcies

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Without financial statements, trade payment information has traditionally been regarded as the most reliable data source for evaluating private company bankruptcy risk. Traditional models, akin to the DBT Index (Days Beyond Terms), will summarize historical payment timeliness on a dollar-weighted average basis.

While the DBT Index is useful for assessing how a business has paid its suppliers in the past, such models do not provide forward predictions on payment risk if the future is materially different than the past. Enter CreditRiskMonitor’s 70%-accurate PAYCE® score, an AI-driven and forward predictive model that has proven significantly more effective in providing earlier warning signals and predicting bankruptcy filings than traditional trade payment summary models.

CreditRiskMonitor is a B2B financial risk analysis platform designed for credit, supply chain, and other risk managers. Our service empowers clients with industry-leading, proprietary bankruptcy models including our 96%-accurate FRISK® score for public companies and 70%-accurate PAYCE® score for private companies, and the underlying data required for efficient, effective financial risk decision-making. Public company coverage comprises more than 57,000 businesses worldwide, totaling $69.3 trillion in corporate revenue compared to global GDP of $85.9 trillion. Additionally, private company coverage includes information on millions of businesses the world over. Thousands of corporations around the world – including more than 35% of the Fortune 1000 – rely on our expertise to help them stay ahead of financial risk quickly, accurately, and cost-effectively.

Where PAYCE® Scores Shine

According to the PAYCE® score white paper authored by Dr. Camilo Gomez, CreditRiskMonitor SVP of Data Science, the model is based upon deep neural networks which learn complex payment patterns indicative of financial stress. Since private companies do not have access to equity markets and sometimes narrower channels of debt financing, payment patterns frequently reflect the financial health of private firms. Larger companies will also seek to manage their working capital by delaying payments to maximize cash efficiency. With this complexity in payment behavior, the PAYCE® score gives risk professionals the ability to more appropriately identify scenarios that eventually lead to bankruptcy.

What’s more, by collecting more than $2 trillion in trade receivables annually through the Trade Contributor Program, CreditRiskMonitor has enhanced its private company coverage on more than 100K businesses in both the U.S. and Canada. Within that group of coverage, PAYCE® score accuracy is supported by robust trade payment information:

“A PAYCE® score is only calculated when there is both a significant number of trade contributors and trade lines on a company.”

Additionally, the model also integrates U.S. federal tax lien data to further classify private companies in financial distress. Although uncommon, outstanding federal tax liens indicate that a given business has failed to pay a tax debt, which serves as an important red flag.

The PAYCE® score measures financial stress based on a "10" (lowest risk)-to-"1" (highest risk) scale. Anything equal to "5" or less is considered high risk, which we commonly refer to as the “red zone.” A PAYCE® score of "1" indicates bankruptcy risk as high as 50% in the coming 12-month period. 

Below is the PAYCE® score probability of bankruptcy chart:

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PAYCE table

Through the first half of 2021, several companies demonstrated high-risk PAYCE® score trends well before the DBT Index indicated slow or delinquent payments. 

Glass manufacturer J.E. Berkowitz L.P., headquartered in New Jersey, exhibited prompt payment patterns that only meaningfully deteriorated four to five months prior to its Chapter 7 liquidation bankruptcy on June 14, 2021. The PAYCE® score provided 12 months of advanced notice, even while payments remained prompt:

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J.E. Berkowitz L.P. PAYCE® score

The bakery product manufacturer, Something Sweet, Inc., sells and distributes assorted pies and cakes from Connecticut. Prior to filing for bankruptcy on July 2, 2021, the PAYCE® score steadily declined into the red zone which provided several months of additional warning relative to the DBT Index:

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Something Sweet, Inc. PAYCE® score

The Texas-based restaurant chain, Tahoe Joe’s Inc., filed for bankruptcy on Apr. 20, 2021. The company carried consistently prompt payments throughout 2020 while the PAYCE® score trended deep in the red zone. Even though the DBT Index still indicated prompt payments at the end of 2020, the PAYCE® score had declined to the riskiest category of “1.”

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Tahoe Joe's Inc. PAYCE® score

Bottom Line

You’ve got to give to get. As more companies participate in the Trade Contributor Program and monthly trade balances continue to grow, total PAYCE® score coverage will continue to expand and the overall accuracy of the model will increase. The three bankruptcies above demonstrate that the PAYCE® score offers improved efficiency for risk assessment, both in terms of absolute classification and better timing versus alternative models. Such lead times give risk professionals the ability to monitor and pivot their exposure before bankruptcy impacts their portfolios. 

Contact us to learn more about the PAYCE® score or Trade Contributor Program to see how it can improve your company’s existing workflows.