U.S. private company bankruptcy filings have accelerated in 2023’s first several weeks. For PAYCE® score bankruptcies specifically, January registered the highest tally since 2020. The triple threat of high debt burdens, inflation, and rising financing costs are fueling this bankruptcy trend. In this article, we will review the latest enhancements to the PAYCE® score and 2023 bankruptcy examples that uncovered hidden high-risk.
CreditRiskMonitor is a B2B financial risk analysis platform designed for credit, supply chain, and other risk managers. Our service empowers clients with industry-leading, proprietary bankruptcy models including our 96%-accurate FRISK® score for public companies and 80+%-accurate PAYCE® score for private companies, and the underlying data required for efficient, effective financial risk decision-making. Thousands of corporations worldwide – including nearly 40% of the Fortune 1000 – rely on our expertise to help them stay ahead of financial risk quickly, accurately, and cost-effectively.
The PAYCE® Score Improvement
CreditRiskMonitor updated its PAYCE® score last fall, a bankruptcy prediction model for private companies when financial statements are unavailable. The score’s primary data inputs include nearly $3 trillion in annual trade payments collected through the Trade Contributor Program, U.S. federal tax liens, and firmographic data. For the PAYCE® score’s model calculation, a significant number of trade lines and reporting counterparties for each company are required, which makes the score more comprehensive and reliable than traditional payment models. Federal tax liens are another important factor, as they indicate default on tax debts. Lastly, the revised model also leverages artificial intelligence with non-linear calculation methodologies, similar to those employed by the FRISK® score, to deliver even greater outperformance.
PAYCE® performance is measured by the bankruptcy capture rate, defined as having a high-risk “red zone” score (anywhere from a “5” down to a rock-bottom “1”) for at least three months prior to filing. The latest enhancement increased the PAYCE® capture rate from 71% to 80%, where performance improved across all high-risk buckets. The riskiest PAYCE® scores of “1” and “2” together identify nearly half of all reported private company bankruptcies. While accounting for just 2.5% of the scored population, the lowest PAYCE® scores are capturing the biggest bankruptcy cases with the most dollars at risk at a superlative rate. More distressed private companies will now trend into these riskiest scores before filing bankruptcy, which allows CreditRiskMonitor subscribers to prioritize counterparty risks more efficiently and take action.
The PAYCE® score’s total business coverage also more than tripled from about 100,000 U.S. and Canadian private businesses to more than 333,000 (and counting) including nearly all U.S. private companies with annual revenue of $5 million or more.
PAYCE® Outperforms Payment Behavior
Traditional models, akin to the Days Beyond Terms (DBT) Index, will summarize historical payment timeliness on a dollar-weighted average basis. Backward-looking statistics can provide some descriptive value, but relying on them to forecast future performance becomes significantly less dependable during volatile economic periods.
The six bankruptcy examples below support using the forward-looking and predictive PAYCE® score over the backward-looking and descriptive DBT Index. In all cases, the PAYCE® score:
- persistently trended in the red zone for at least 12 months before filing
- trended in the riskiest classifications of “1” or “2” for at least six months
- outperformed the DBT Index, especially for Simmons Bedding Company, LLC.; AD1PB Airport Hotels, LLC; and GRM Industries, LLC.
| Business Name | Score/Index | -12 | -11 | -10 | -9 | -8 | -7 | -6 | -5 | -4 | -3 | -2 | -1 | Bankruptcy | Bankruptcy Date |
| Simmons Bedding Company, LLC | PAYCE® Score | 3 | 2 | 3 | 3 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | Jan. 23 |
| DBT Index | 9 | 9 | 9 | 9 | 9 | 9 | 9 | 10 | 10 | 9 | 9 | 9 | 9 | ||
| AD1 PB Airport Hotels, LLC | PAYCE® Score | 5 | 4 | 5 | 4 | 3 | 2 | 2 | 2 | 2 | 1 | 1 | 1 | 1 | Jan. 22 |
| DBT Index | 9 | 8 | 9 | 9 | 9 | 9 | 9 | 9 | 9 | 9 | 9 | 9 | 9 | ||
| Matcon Construction Services, Inc. | PAYCE® Score | 2 | 3 | 5 | 3 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | Jan. 20 |
| DBT Index | 7 | 7 | 7 | 9 | 9 | 8 | 7 | 6 | 4 | 3 | 3 | 3 | 3 | ||
| Dane County Contracting, LLC | PAYCE® Score | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | Jan. 17 |
| DBT Index | 7 | 9 | 9 | 7 | 7 | 9 | 9 | 9 | 9 | 9 | 8 | 7 | 7 | ||
| GRM Industries, LLC | PAYCE® Score | 3 | 3 | 3 | 3 | 2 | 3 | 2 | 2 | 2 | 3 | 2 | 2 | 2 | Jan. 16 |
| DBT Index | 3 | 6 | 6 | 6 | 6 | 6 | 6 | 9 | 8 | 8 | 8 | 8 | 8 | ||
| B GSE Group, LLC | PAYCE® Score | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | Jan. 6 |
| DBT Index | 8 | 8 | 8 | 8 | 8 | 8 | 8 | 7 | 7 | 6 | 6 | 5 | 5 | ||
Among the largest private bankruptcies was mattress firm Simmons Bedding Company, LLC., with estimated assets and liabilities ranging between $1-10 billion. Despite paying its bills on time for more than a year, the PAYCE® score consistently signaled financial distress. The company’s proposed restructuring support agreement plan implies substantial creditor haircuts as outstanding debt is expected to be reduced from $1.9 billion to $300 million. According to the bankruptcy petition, the largest 30 unsecured creditors are all trade vendors with total claims approaching $87 million. With the average trade claim being $2.9 million, users of CreditRiskMonitor receive an incredible benefit as the typical cost of the subscription is only a fraction of one percent. Across bankruptcy cases broadly, if the service helps prevent losses on even one bankruptcy, it will pay for itself many times over.
The other bankruptcy examples demonstrate the DBT Index signaling either prompt payments or unpredictable payment behavior trends. The consistency provided by the PAYCE® score, however, informs subscribers to take action to mitigate risk before bankruptcy. Subscribers can review all of their counterparties at a portfolio level and obtain factors driving each company’s score using the PAYCE® Score Analysis Box found on the snapshot page for all “red zone” business reports.
The top takeaways for subscribers in navigating this bankruptcy environment include:
- Anticipate more private company bankruptcies during a higher interest rate regime
- Do not rely upon past payment performance as the primary method of risk assessment
- Integrate the PAYCE® score into your private company risk evaluation workflows
- Compare the PAYCE® score against internal and third-party risk scores and ratings
- Establish “monitor and review” protocols for PAYCE® scores between “3” and “5”
- Prioritize and consider risk mitigation for PAYCE® scores of “1” and “2”
Bottom Line
Subscribers should not fall into a false sense of security by relying on past payment performance when analyzing private company credit risk. PAYCE® bankruptcies have already reached levels equivalent to the peak of 2020, and many companies exhibited varied payment behavior prior to failure. The current uptick in bankruptcy filings is a potential warning of the first cracks in the credit cycle. It is best to be proactive, conducting more frequent and thorough counterparty reviews now before your company is affected. Contact CreditRiskMonitor to learn more about the PAYCE® score or other risk solutions to see how we can improve your company’s existing workflows.