Advanced Warnings on Private Company Bankruptcy with the PAYCE® Score
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The 70%-accurate PAYCE® score provides immense value to CreditRiskMonitor clients who cannot obtain financial statements on their counterparties. Our Trade Contributor Program collects more than $2 trillion in accounts receivables annually – a figure which continues to climb in the years to come. Such trade collection continues to grow our extensive collection of invoice data, generating more and more PAYCE® scores on U.S. private companies each month.
Below, you’ll see how the PAYCE® score was instrumental in identifying bankruptcy danger within three high-profile private companies well before the days that they respectively filed for Chapters 7 and 11.
Assistance with Artificial Intelligence
The PAYCE® model leverages deep neural network technology and derives its scoring methodology from public filings as well, including federal tax liens, or unpaid bills that have a first payment priority.
In the third quarter of 2021, several private companies filed for bankruptcy without any meaningful prior notice through news or trade payment summaries. The latter suggests that traditional payment-based models would have signaled low risk, including industry-standard tools such as Dun & Bradstreet’s PAYDEX® score, which is akin to the Days Beyond Terms (DBT) Index used by CreditRiskMonitor. The PAYCE®/DBT comparison is crucial in illustrating the meaningful difference in adopting forward-looking predictors versus backward-looking statistics.
In the three case examples below, Brown Industries, Inc., Onsite Truck & Trailer Service, LLC, and Advanced Sawmill Machinery, Inc. demonstrated payment behavior consistent with the average private company. When looking at the PAYCE® score, the AI-infused model 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.”
Brown Industries, Inc. filed for Chapter 11 bankruptcy on Aug. 20, 2021, in the U.S. Bankruptcy Court for the Northern District of Georgia. While the company’s payment history was consistently prompt in the prior 12 months, the PAYCE® score entered the red zone in November of 2020 and subsequently indicated financial distress for five consecutive months prior to failure. Total liabilities at the initial filing were estimated to be between $10-50 million.
Onsite Truck & Trailer Service, LLC’s payment performance principally trended promptly, minor bouts being slightly past due. However, the PAYCE® score signaled six consecutive months of financial distress prior to its Chapter 7 liquidation proceeding filed on Sept. 9, 2021. This bankruptcy type often results in substantially lower recovery rates for unsecured creditors.
Advanced Sawmill Machinery, Inc.’s payment behavior fluctuated between prompt and slow, while the PAYCE® score persistently trended in the red zone. However, the company also was the recipient of a federal tax lien as of early June, which delivered a significantly negative impact to the PAYCE® score. The company filed for Chapter 11 bankruptcy on Sept. 20, 2021.
Despite an environment of easy credit and many private companies displaying prompt to moderately slow payment behaviors, the PAYCE® score continues to slice through the noise and accurately identify those businesses with true bankruptcy risk.
Our subscribers who swear by the PAYCE® score understand that past is not always prologue, especially for private companies – when that tax lien arrives, or there’s some yo-yoing in the promptness of payments, a CreditRiskMonitor competitor’s scoring model might write such detrimental happenings off as inconsequential. The PAYCE® score is backtested rigorously to pick up on danger early and loudly, warning on hundreds of otherwise imperceptible private company bankruptcies each year since its introduction to the market in 2018.
The artificial intelligence leveraged in the PAYCE® score allows analysts to look around the corner in uncertain corridors; it chiefly helps risk professionals find a more direct path to addressing financially distressed counterparties. Moreover, performing detailed examinations of trade payment experiences can be difficult, time consuming, and even outright misleading as the aforementioned bankruptcy cases establish. With limited information available on many private companies, the monthly-updated PAYCE® score offers subscribers unique financial risk insight with which to make better business decisions. Contact us today to learn more about the Trade Contributor Program and our private company solutions.