Credit Experts Align to Say Bankruptcy Risk Exploding in Wake of COVID-19

On Apr. 6, CreditRiskMonitor CEO Jerry Flum participated in a webinar panel hosted by Credit Today entitled “Information Resources for Navigating the COVID-19 Economic Disruption.”

The major takeaway of this webinar was that public company bankruptcy risk is rising in what are unprecedented times. The spread of coronavirus is increasingly affecting global commerce, and it is safe to assume that in emerging from the end of this scary pandemic, the more vigilant way trade creditors will undoubtedly scrutinize corporate debt in the wake of COVID-19 must not let up.

Here are four key themes from the Credit Today panel and Flum’s presentation to help you navigate this turbulent and high-risk period.

Global Public Company Risk is at DEFCON 3, Trending towards DEFCON 2

The online panel started off with a slide from CreditRiskMonitor outlining the financial losses that will occur when this economic downturn collides with historically high public company debt. The headline is that defaults at public companies are likely to drive $1.2 trillion in losses to bondholders if historical patterns between debt and default rates hold true. The losses could be much worse if COVID-19 leads to a deeper and more protracted downcycle. And worst of all, unsecured trade creditors stand below bondholders during bankruptcy in the payment priority waterfall.

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Global debt is higher than it's ever been, driven by historically low interest rates.
Source: NYU Salomon Center and Federal Reserve Bank of St. Louis.

Flum mentioned that this data only covers U.S. public companies. Add private companies to the mix and the loss only gets bigger. Include foreign companies and the numbers become unfathomable. Credit risk, and the surge in nonfinancial corporate debt-to-GDP, are serious issues that must be addressed now by any risk professional.

The 80/20 Rule: Look at Dollars at Risk, Not the Amount of Companies at Risk

Every panel member agreed that credit professionals need to have a clear understanding of where the biggest risks lie in their accounts receivable portfolios. To that end, David Schmidt, Contributing Editor at Credit Today, brought up the 80/20 rule of thumb, which states that 80% of your revenue is likely to come from only 20% of your customer base. Those numbers aren't meant to be precise, of course, but the takeaway is clear: a small number of customers (i.e. public companies) will make up the vast majority of your company's top line.

CreditRiskMonitor provides commercial credit reports and bankruptcy risk scores on more than 56,000 public companies around the world. We specifically focus on helping you get a handle on your biggest risks, highlighted by the 96% accurate FRISK® score, which brings together multiple factors into an easy-to-use "1" (highest risk) to "10" (lowest risk) scale. Any company with a FRISK® score of "5" or less should be closely monitored because bankruptcy risk is elevated:

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FRISK Table

Never, Ever Let Down Your Guard

Another theme from the panelists was the importance of consistent monitoring. One suggestion that was repeated by multiple participants was to use a trigger mechanism to help you know when and where you need to focus your valuable time. Although many ideas were presented by the credit professionals on the

panel about how to handle this vital task, the CreditRiskMonitor service provides email updates related to important news events on the companies subscribers follow. Notably, that includes emails when a company's FRISK® score falls to a "5", with subsequent updates as the score falls deeper into the high-risk territory. Note that 67% of all public company bankruptcies land in the FRISK® score of "1" or “2” prior to filing.

The Supply Chain is Crucial

One more topic of vital importance from the panelists was that your company's risks are not isolated to customers. Not only do you need to assess whether you will get paid, but, as the impact of COVID-19 spreads, you also need to be concerned that your suppliers will deliver. Suppliers in financial stress may not only be unable to deliver their products, but things such as quality and servicing can suffer as well.

By covering a vast spectrum of public companies around the world, CreditRiskMonitor can help you monitor these risks. The service specifically offers a peer analysis report that provides access to a list of a company's competitors. That list is the perfect launch pad for researching alternative suppliers should your current supplier be facing financial headwinds. For example, a manufacturer can identify new suppliers of feedstocks, components, and parts by SIC and NAICS codes in any geography around the world.

Bottom Line

Recessions are bad enough, but COVID-19 is complicating the normal story. An economic downturn appeared inevitable considering the world had been experiencing an unprecedented-in-length benign credit cycle combined with a surge of nonfinancial corporate debt-to-GDP. This pandemic is providing a painful declaration: the “risk on” decade is done.

Now is your last chance to adjust. If you wait any longer and leave yourself as a trade creditor or a procurement manager exposed, you will recoup literal pennies on the dollar. CreditRiskMonitor is here to help you with getting that better process of monitoring public companies started. Contact us today for a demonstration of the service that was tailored to help risk professionals manage through these difficult times.

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 57,000 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 $2 trillion on their counterparties every year, giving them visibility into their biggest dollar risks.