FRISK® Score Downgrade Shockwave, Largest Since the Global Financial Crisis

CreditRiskMonitor® has been closely monitoring the coronavirus impact on public company credit quality. In a recent webinar hosted by Credit Today, CreditRiskMonitor® CEO Jerry Flum reiterated that corporations worldwide were already highly leveraged prior to the COVID-19 outbreak and the pandemic has pushed the world as a whole into a working capital crisis. With companies running out of options, Flum recommended that risk professionals take action immediately and that analysts today are better served by ignoring trade payables and payment behavior, as CFOs, now more than ever, are deliberately painting healthy pictures to secure working capital runways. The proper alternative metric to follow when looking at public company bankruptcy risk is the FRISK® score. Not only does the FRISK® score capture 96% of all public company bankruptcies within the forward 12 months, but it updates daily thanks to the score’s capital market and crowdsourcing inputs which provide intra-monthly and intra-quarterly signals that cannot be replicated in payment based scores. 

Notably, U.S. and worldwide public companies have seen the most FRISK® score downgrades since the Global Financial Crisis. The FRISK® score leverages high-quality data including stock market performance, financial statement ratios, bond agency ratings, and crowdsourced click patterns of credit managers and other subscribers to churn out the ultra-accurate analytic. More than 35% of the Fortune 1000 rely on the FRISK® score to prioritize their highest risk accounts and implement exposure mitigation.

Following the impact of the coronavirus, worldwide FRISK® score movements have been far-reaching:

  • High-risk companies have expanded from approximately 12K to nearly 18K, a 50% increase
  • Low-risk companies have declined from 14K to less than 8K, a 43% decrease
Worldwide FRISK image

For the United States, the FRISK® score shifts have been even more pronounced:

  • The high-risk cohort grew from about 1,300 to more than 2,000 companies, a 54% increase
  • The low-risk cohort narrowed from 1,700 to less than 650 companies, a 62% decline

Net migration involves low-risk companies moving into medium risk, while medium risk transition into high risk. The primary drivers for these trend shifts are:

  • Poor stock market performance, being a leading indicator, captured rising price volatility and falling market capitalization trends. Companies with narrowing equity cushions have limited access to funding sources; monitor whether a company’s market capitalization falls below book value or total outstanding liabilities.
  • Subscriber crowdsourcing concerns also serve as a leading indicator. As multiple risk professionals become worried about a financially distressed company headed towards bankruptcy, they exhibit particular research patterns within the commercial credit report. Those aggregated pessimistic views are reflected in the model in real-time.
  • Rating agency downgrades are a coincident factor. Corporations are receiving credit downgrades across the rating spectrum. Among the most important changes to monitor are BBB-rated debt shifting into the junk bond category (otherwise known as Fallen Angels) and highly speculative B-rated issuers collapsing into the CCC-rated segment, which could make debt issuance or refinancing difficult, if not impossible. Institutional investors, such as insurers, pension funds, and mutual funds, are typically barred from owning junk bonds because they do not meet their prospectus mandates.
  • Financial statement weakness is beginning to filter through but most filers do not release first quarter earnings until late April or May. As these reports come in, however, there could be another round of FRISK® downgrades based on weak operating performance, working capital contraction from cash burn, and leverage increasing multiple turns from credit facility draw downs and bond issuances.  

Among the most prominent changes in CreditRiskMonitor®'s coverage was the increase in FRISK® “1” companies, rising a steep 63% quarter-over-quarter. This highest risk category represents 10-to-50x higher risk of bankruptcy versus the average public company, and FRISK® "1" companies exhibit poor survival rates over a multi-year period. 

In April, bankruptcy filings and rumors ballooned in the sectors of consumer, energy, and technology. Some low FRISK® score companies that are making headlines include: 

These companies, collectively, represent $3 billion in accounts payable.

Identifying high-risk counterparties should be your top priority today. Once you have done so, you should evaluate each company’s latest financial statements to assess changes that have taken place when first quarter reports come in. According to Flum, risk professionals need to rely on certified financials because they are “the most credible sources of information.”

After running ratio and trend analysis, compare each company against its competitors. CreditRiskMonitor®'s unique industry peer analysis feature simplifies that process. Falling into bottom-quartile rankings or well below the industry median, particularly for performance, liquidity, and leverage, are primary warning signs of distress. It’s also crucial to look out for companies that suspend forward guidance and issue more debt that effectively place unsecured creditors (which includes trade creditors) in a more precarious position. 

Understandably, corporate treasurers are nervous about accounts receivable as they need to preserve cash flow with normal repayment cycles and collect full amounts owed. Companies must prioritize their largest receivables by company and, if deemed exceedingly hazardous, be sure to eliminate exposure. Credit professionals use CreditRiskMontior's Trade Contributor Program, which collects more than $2 trillion receivables annually, to stratify risk by account with the FRISK® score. Contributors are leveraging these FRISK® score updates, and are already considering and implementing the following action steps:

  • Updating their risk classifications
  • Reassessing all future credit extensions to high-risk accounts 
  • Reducing credit terms, e.g. 60 days to 30 days, and demanding cash on delivery
  • Requesting secured guarantees via letters of credit 
  • Postponing or halting shipment of products

Bottom Line

FRISK® score downgrades have grown at an unprecedented rate around the world. Given the coronavirus has unleashed the global debt crisis that CreditRiskMonitor has been predicting, credit professionals need to take action to ensure that they aren’t unduly impacted by delayed payments and bad debt write-offs. Contact us today for a free risk assessment to see how your portfolio’s condition has changed because of the coronavirus.   

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