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Coined by Dun & Bradstreet in their 2012 white paper, “Bankruptcy: Why the Surprise?”, the cloaking effect describes the phenomenon that public companies have the capability of maintaining prompt payment all the way up until their bankruptcy filing. Dr. Camilo Gomez, CreditRiskMonitor’s Senior Vice President of Quantitative Research, offers insight on the payment trends prior to bankruptcy for both public and private companies: “Private companies often show deterioration in payment behavior in the quarters leading up to bankruptcy, whereas public companies demonstrate relatively consistent performance.”

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DBT Trajectory

杨记兴During a benign credit cycle, your receivable bad debt expenses will be very low because public company profits are stable and financing is easily accessible.杨记兴 As credit conditions deteriorate, financing for public companies becomes increasingly expensive and availability shrinks. Companies with highly leveraged balance sheets can quickly slip into bankruptcy and cause substantial financial losses for counterparties.

An example of this event can be found in the bankruptcy of Toys “R” Us: The company had more than $1 billion in accounts payable, and suppliers incurred enormous write-downs on their accounts receivable.?

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杨记兴CreditRiskMonitor’s FRISK? score predicts bankruptcy for public with 96% accuracy.杨记兴 The FRISK? is based on a “1” (highest risk)-to-“10” (lowest risk) scale, and anything equal to “5” or less is indicative of high risk. We recommend that subscribers pay attention to businesses that are in this “red zone” category, as illustrated below.

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FRISK Table

The FRISK? score is highly convenient for credit professionals because:

  • Coverage is approximately 56,000 public companies worldwide.
  • 80% of all bankruptcy filings occur in the “1” to “3” range.
  • Elevated bankruptcy risk is identified 12 months in advance of the filing.

The PAYCE? score is only used for private companies where financial statement data is unavailable. The model employs deep neural network AI to produce a 70% accuracy rate by considering payment behavior and federal tax liens. Just like the FRISK? score, the PAYCE? score also uses a “1”-to-“10” scale to identify levels of risk.

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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.?