Payment Scores Miss Bankruptcy, While the FRISK® Score Predicts It

During a long economic expansion it's easy to dismiss financial risk, particularly when most companies are paying their bills on time. However, public companies usually hide financial distress with their prompt payment behavior. The truth is that corporate debt levels are higher than ever and it’s important to have your company’s risk department prepare now.

Instead of looking into the past with payment history, you need to be looking forward with CreditRiskMonitor®’s predictive financial risk analytics.

Payment Data Fails

CreditRiskMonitor® research shows that public companies, which account for the largest amount of dollar exposure, often pay on time right up to the point of bankruptcy. This behavior will make certain financial health scores appear strong, but it actually disguises risk.

In 2012, Dun & Bradstreet labeled this phenomenon in a white paper as the "cloaking effect.” Their report, aptly titled "Bankruptcy: Why the Surprise," explained to D&B customers why its payment-based PAYDEX® score failed to highlight bankruptcy risk. D&B admitted that payment data isn't "...singularly or collectively sufficient to perform the credit analysis needed."

CreditRiskMonitor®'s data confirms D&B's research on this matter. The table below compares the payment based DBT Index, which is similar to the PAYDEX® score, to CreditRiskMonitor®’s proprietary FRISK® score that predicts bankruptcy risk with 96% accuracy:

Year Bankrupt Company DBT Index FRISK® Score
2019 Hexion Inc. 9 1
2018 Sears Holdings Company 9 1
2017 Toys 'R' Us, Inc. 9 1


CreditRiskMonitor®'s historical FRISK® scorecard shows these situations are not unique. Each of these companies, and many more over the last three years, kept paying on time until they declared bankruptcy. CreditRiskMonitor®'s FRISK® score has correctly pinpointed the risk that payment data has otherwise missed.

The FRISK® score uses a "1" (highest risk)-to-"10" (least risk) scale and typically provides 12 months of advanced notice. Therefore, CreditRiskMonitor® subscribers are not surprised by bankruptcies, they are forewarned. Any company in the lower half of the range, called the "red zone," should be closely monitored.


More Risky Business

The FRISK® score's historical success provides our company the requisite statistics to show how we’re the most accurate service in the marketplace, but the past is the past: what matters most to us is helping you steer clear of future bankruptcies – seeing danger where it’s going to be in 2020, 2021 and beyond, not just where it is today. CreditRiskMonitor® estimates that losses on public companies will surpass $1.1 trillion during the next economic downturn. As a small sample, here are four companies that commercial counterparties should be monitoring closely today:

Company Industry DBT Index FRISK® Score
J. C. Penney Company, Inc. Retail - Department and Discount 8 1
Eastman Kodak Company Printing Services 9 1
YRC Worldwide Inc. Trucking 9 2
Hovnanian Enterprises, Inc. Construction Services 9 1


These are only a handful of financially distressed companies in the U.S. today and around the world.

Don't Be "Surprised", Be Informed

The few situations noted above are examples of how payment data fails to identify financial risk. These are not unusual situations, in fact, they happen quite often. Instead, use predictive scoring and analysis. That’s why more than 35% of the Fortune 1000 rely on CreditRiskMonitor® to mitigate public company bankruptcy risk. Consider using the 96% accurate FRISK® score as a part of your risk management strategy before you are "surprised" by unreliable payment data.

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