Executive Summary: U.S. Bankruptcies and Form 5500 Filings

Transcription

1 Executive Summary: U.S. Bankruptcies and Form 5500 Filings Companies that DO NOT file Form 5500 ( i.e., do not have their own retirement and/or welfare benefit plans) are over 10 times more likely to declare bankruptcy. Companies that filed for bankruptcy experienced significant declines in their BQ revenue, profitability, and employment indicators in the years leading up to bankruptcy. Simply put, companies that are financially healthy and stable are more likely to offer benefit plans to their employees, and do so in a consistent and responsible fashion. BizQualify captures events related to the failure to provide a pension or welfare benefit to their employees.this should have... instant ramifications on the quality of their credit. [Deutsche Bank Report, page 19] We loosely call these credit events. Our rationale for this is that a company that fails to pay its employees is likely to be under financial stress or have defaulted on other payments as well. [Deutsche Bank Report, page 6] BIZQUALIFY DATA FROM IRS FILINGS BizQualify ( BQ ) leverages Form 5500 filings with the IRS and Dept. of Labor (pertaining to employee welfare benefit and/or retirement plans; e.g., health insurance, 401k) to generate 100% verifiable financial data and metrics on over 1 million U.S. companies (with 100M employees). BQ has data on employment, revenue, growth, profitability, and credit risk; as well as address and phone, contacts, s, and industry classifications. BQ data is updated monthly and spans 2010 present. The BQ Risk Score is based on 100+ corporate credit risk indicators (e.g., failure to make timely payments, failure to provide benefits, no filings in the past two years, closure of a plan). CORPORATE BANKRUPTCIES Corporate bankruptcy filings from the 94 U.S. Bankruptcy Courts ( (Chapters 7, 11, and 15) for July and November 2015 were matched to Form 5500 filings. 1,872 companies (1,066 in July and 806 in November) declared bankruptcy in July and November 2015, of which 129 filed Form 5500 (67 in July and 62 in November) with these characteristics: Downward trend in revenue indicator: -21% in the previous year. Headcount: 363 (average); 32 (median). Revenue (estimate): $213M (average); $13M (median). Years offering a benefit plan: 17 (average); 13 (median). Average BQ Risk Score: 459 (1,000 is the best, U.S. median is 523). There is no small company bias since 10 is the median headcount across all 1 million companies that file Form 5500, while the median headcount for bankrupt companies is 32. Some examples of companies that declared bankruptcy and filed Form 5500: Company Name State BQ Growth Score BQ Risk Score 3-Year CAGR BQ Revenue Indicator 3-Year CAGR BQ Employment SPIN PCB SOLUTIONS INC NH % -3% WEB2WEB MARKETING INC CA % 11% IRIS HERNANDEZ DDS PA FL % 0% LYLE COMMUNICATIONS INC UT % -10% GO YE VILLAGE INC OK % -67% Copyright 2016 BizQualify LLC U.S. Patent Pending P a g e 1

2 Detailed Report: U.S. Bankruptcies and Form 5500 Filings Challenge: Reliable financial data and information is needed on private and public companies to make effective credit decisions. Among the approximately 30 million companies in the U.S., it is not difficult to get information on the 4,000 publicly traded ones from their SEC filings. But financial data on privately held companies is also required to complete the picture. Credit risk arises whenever a company is expecting to use future cash flows to pay debt or meet a contractual obligation. When a company takes on too much risk and is not able to pay for its financial obligations or remain solvent, it has to declare bankruptcy. With leading data vendors relying heavily on utility bills, surveys, news articles, and models, it is difficult to assess the financial stability and credit risk of B2B clients and vendors, especially private companies. Solution: BQ solves this problem by leveraging Form 5500 (ERISA) filings with the IRS and Dept. of Labor, which cover employee benefit plans (e.g., health insurance, dental, vision, disability, 401k) for 1 million companies accounting for 100 million employees (90% of the U.S. labor force). These filings are subject to audit because they must be consistent with IRS tax returns due to the fact that a company s expenditures (cash-based) on benefit plans are generally tax deductible. BQ data and metrics capture a number of negative events ( credit events ) relating to the company s failure to provide or pay for a pension or welfare benefit for its employees, which shows that a company is likely to be under financial distress or have defaulted on other payments. BizQualify s Advantage: BQ uses proprietary patent-pending algorithms developed through years of academic research to collate, parse, and extract meaningful financial and credit risk indicators from the filings. BQ algorithms utilize in-house expertise on complicated accounting and tax rules underlying the multiple schedules of Form 5500 filings and 10,000+ line items within the filings. The data is verifiable in that it can be traced back to its source from the IRS. The mandatory filing fields ensure consistency in the definitions of financial indicators over time and across companies and industries. BQ leverages the 5-year history of IRS filings by the company, which includes their historical name, address, phone, and EIN to identify and track companies over time as they move, become acquired, or merge with other companies. BizQualify vs. Credit Bureaus: BQ s sources and methods are considerably different from those utilized by traditional credit bureaus, as illustrated in this table: Table 1: Credit Bureaus vs. BizQualify: Data and Credit Scoring Credit Bureaus BizQualify Firmographics based on surveys & modeling; business identification is an issue: multiple records & inaccurate Credit info: based on trade data & UCC filings Credit score: based on a statistical model Black box Firmographics based on IRS filings; business identification is accurate: single record & verifiable Credit info: based on delinquency reported in IRS filings Credit score: calculated from verifiable indicators Transparent & auditable Copyright 2016 BizQualify LLC U.S. Patent Pending P a g e 2

3 Introduction BQ mapped corporate bankruptcy filings (Chapters 7, 11, and 15) during the months of July and November 2015 from the 94 U.S. Bankruptcy Courts to Form 5500 filings. The motivation was to investigate if BQ data and metrics are leading indicators of financial distress for a company. The first step was to verify if there is a correlation between the financial health of companies filing for bankruptcy and those filing Form 5500 (i.e., have their own employee welfare or benefit plans). Among the bankrupt companies that filed Form 5500, we examined whether BQ data and metrics could identify and benchmark the financially healthy ones by parsing and analyzing their contributions, payments, and defaults as reported by the companies to the IRS. Bankruptcy Basics: Bankruptcy helps financially distressed individuals and businesses, either by liquidating assets to pay off their debts or by creating a repayment or reorganization plan. The types of corporate bankruptcy filings tracked in this study are: Chapter 7: Businesses may file Chapter 7 of the Bankruptcy Code for "liquidation" or sale of a debtor's nonexempt property. The proceeds are then distributed to creditors. Chapter 11: Under chapter 11, the debtor may seek an adjustment of debts, either by reducing the debt or by extending the time for repayment, or may seek a more comprehensive reorganization. Chapter 15: When parties from more than one country are involved, bankruptcies are filed in this fashion. Chapter 15 is filed by foreign companies with U.S. operations. Bankruptcy Data Selection: Corporate bankruptcy data was extracted from Public Access to Court Electronic Records (PACER) for July and November PACER is an electronic public access service ( that allows members of the general public to obtain bankruptcy filing details from federal bankruptcy courts immediately after the bankruptcy case has been electronically filed. Filing records include information on the company s legal name, address, EIN (unique number issued by the IRS), date of filing, and the type of bankruptcy. Matching these bankruptcy filings to Form 500 filings is a labor-intensive process with multiple steps of verification performed to ensure absolute accuracy. Given the lengthy manual verification of records, BQ examined the bankruptcy filing data for July (with the maximum percentage of bankruptcy filings in 2015, 10.44%) and November (with 7.88% of total bankruptcies in 2015). November and July filings were examined in order to take into account potential seasonal effects. Overview of Bankruptcy Courts U.S Bankruptcy Courts: There are 94 U.S. federal courts under the federal judicial districts, with at least one district in each state in the U.S., the District of Columbia, and Puerto Rico. Bankruptcy cases are filed in all of these courts including district courts in the Virgin Islands, Guam, and the Northern Mariana Islands. The Federal courts have full control on the filing and processing of bankruptcy cases such that the states do not play a role in the financial fates of their constituents. There is no single "supreme" bankruptcy court. Judicial Districts: Bankruptcy filings do not come evenly to all parts of the country. Overseeing the 94 districts into which the U.S. is divided are 12 circuits that, for the most part, are organized Copyright 2016 BizQualify LLC U.S. Patent Pending P a g e 3

4 with respect to closeness. Puerto Rico is a member of the First Circuit along with Maine, New Hampshire, Rhode Island, and Vermont. The Virgin Islands are included with Delaware, New Jersey, and Pennsylvania in the Third Circuit. Guam and the Northern Mariana Islands are part of the Ninth Circuit along with a host of states. It should be noted that the District of Columbia receives its own bankruptcy court. Hence, the sizes of these different circuits may vary greatly. They may be as small as the District of Columbia, or as large as the Ninth Circuit, which includes eleven subdivisions between states and territories. Businesses petition for bankruptcy relief, both domestically (i.e., Chapters 7 and 11) and across international lines (i.e., Chapter 15). Trustees: Bankruptcy court judges do not oversee the complete bankruptcy litigation proceedings. An assigned trustee is appointed for the administration of a bankruptcy case. District bankruptcy trustees represent 21 organized geographic regions and are appointed specifically by the U.S. Attorney General. Sometimes trustees are a non-factor in bankruptcy proceedings, as in Alabama and North Carolina which are under the domain of "bankruptcy administrators" or as in Chapter 11. Among these specific tasks of trustees and bankruptcy administrators are holding creditors meetings and asking questions regarding a repayment plan, distributing agreed-upon monies, and probing charges that a bankruptcy appeal was made in bad faith. Bankruptcy Filings Data from PACER for July and November 2015 Bankruptcy Filings by Courts: During the months of July and November 2015, a total of 1872 corporate bankruptcy cases (Chapters 7, 11, and 15) were filed, out of which 1,066 corporate bankruptcies were filed in July and 806 bankruptcies were filed in November. In July, the maximum number of bankruptcies was filed in the judicial courts of New York followed by Virginia, as seen in Figure 1 below. Figure 1: Bankruptcy Filings in July 2015 by U.S. Courts In November, most bankruptcies were filed in California followed by Texas, as seen in Figure 2 below. Copyright 2016 BizQualify LLC U.S. Patent Pending P a g e 4

5 Figure 2: Bankruptcy Filings in November 2015 by U.S. Courts For the months of July and November combined, most corporate bankruptcies were filed in New York, followed by California, as seen in Figure 3 below. Figure 3: Bankruptcy Filings in July and November 2015 by U.S. Courts Bankruptcy Filings by Chapter: Figure 4 below shows that for the month of July, a total of 1,066 corporate bankruptcies were filed: 327 as Chapter 7 (liquidation), 736 as Chapter 11 (restructuring), and 3 as Chapter 15 (foreign companies with U.S. operation). Figure 4: Bankruptcy Filings in July by Chapter In November, 806 companies filed for bankruptcy: 372 filed Chapter 7, 421 filed Chapter 11, and 13 filed Chapter 15, as seen in Figure 5 below. Copyright 2016 BizQualify LLC U.S. Patent Pending P a g e 5

6 Figure 5: Bankruptcy Filings in November by Chapter Combining July and November, 1,872 companies filed for bankruptcy: 699 filed Chapter 7, 1157 filed Chapter 11, and 16 filed Chapter 15. Figure 6: Bankruptcy Filings in July and November by Chapter Bankruptcy Filings Matched to Form 5500 Filings Companies that filed for bankruptcy were matched manually to Form 5500 filings utilizing multiple verification steps. Table 2 below shows the distribution of bankruptcies by state among companies that filed Form As seen in Table 2, out of 1,872 companies that declared bankruptcy in July and November 2015 (1,066 in July and 806 in November), 129 filed Form 5500 (67 in July and 62 in November). Table 2: Bankrupt Companies that Filed Form 5500 by State July 2015 Bankruptcy Filers November 2015 Bankruptcy Filers State Chapter 7 Chapter 11 Total Chapter 7 Chapter 11 Total Form 5500 Filers AL AZ CA CO CT FL GA ID Copyright 2016 BizQualify LLC U.S. Patent Pending P a g e 6

7 IL IN KS KY MA MD ME MN MO MS NC NE NH NJ NY OH OK PA TN TX UT VA WA WI Canada 2 Total Filers 129 BQ metrics and scores were found to be highly predictive and indicative of bankruptcy, as shown in the examples illustrated in Table 3 below. Table 3: Sample of Bankrupt Companies that Filed Form 5500 Company Name Chapter State BQ Growth Score BQ Profitability Score BQ Risk Score SPIN PCB SOLUTIONS INC 7 NH SENIOR LIVING OPTIONS MARYLAND GARDENS LLC 7 AZ CHAMPAIGN BUILDERS SUPPLY COMPANY 7 IL BREVARD UNIVERSAL INC 7 FL WEB2WEB MARKETING INC 7 CA IRIS HERNANDEZ DDS PA 7 FL H L MERRILL AND SON EXCAVATING INC 7 TX MENSERS HEATING AIR CONDITIONING & REFIGERATION INC 7 NJ COWBOY INDUSTRIES INC 7 NE Copyright 2016 BizQualify LLC U.S. Patent Pending P a g e 7

8 LYLE COMMUNICATIONS INC 7 UT GO YE VILLAGE INC 11 OK BQ metrics and indicators are tracked over a five year period for all companies that file Form These include 3-year CAGR (compound annual growth rates) of indicators relating to revenue, profitability, and employment. Table 4 below provides examples illustrating how significant negative growth precedes bankruptcy. Table 4: 3-Year CAGR Growth Rates (%) of Revenue, Profitability, and Employment for a Sample of Bankrupt Companies that Filed Form 5500 BQ Revenue BQ Profitability BQ Employment Company Name Indicator Growth Rate Indicator Growth Rate Indicator Growth Rate SPIN PCB SOLUTIONS INC SENIOR LIVING OPTIONS MARYLAND GARDENS LLC CHAMPAIGN BUILDERS SUPPLY COMPANY BREVARD UNIVERSAL INC WEB2WEB MARKETING INC IRIS HERNANDEZ DDS PA H L MERRILL AND SON EXCAVATING INC MENSERS HEATING AIR CONDITIONING & REFIGERATION INC COWBOY INDUSTRIES INC LYLE COMMUNICATIONS INC GO YE VILLAGE INC Upon investigating the 1,743 companies that filed for bankruptcy in July and November 2015 but did not file Form 5500, it was discovered that many of these companies had few or no employees, were difficult to identify, or even had no website. Some examples are shown in Table 5 below. Table 5: Sample of Bankrupt Companies that did not File Form 5500 Filing Company Name Chapter State Month Website Other Information TUSCALOOSA RESOURCES INC 11 AL July No website None found PROMISE U INC 7 CA July No website None found FAVORITE THINGS INC 11 FL July No website None found ONPOINT INC 11 NY July No website None found MINERAL PROCESSING AND MARKETING INC 11 TX July No website None found BECK AND BECK ENTERPRISE INC 11 AZ November No website None found ECOSMART INC 11 CA November None found TOMMINS GLOBAL INC 7 NY November No website None found APEX GEOTHERMAL INC 7 PA November No website None found H E JONES AND CO INC 7 TX November No website None found Copyright 2016 BizQualify LLC U.S. Patent Pending P a g e 8

9 In numerous cases, no company information was available upon searching by name and address, other than the bankruptcy case files. Hence, there was no way to verify the number of employees or financial indicators of companies that filed for bankruptcy but did not file Form Summary Statistics for July 2015 Bankrupt Companies that filed Form For the month of July, 1,066 companies filed for bankruptcy, of which 67 filed Form This shows that: Companies that DO NOT file Form 5500 (as they DO NOT have their own welfare and/or retirement plans) are over 10 times more likely to declare bankruptcy. 2. There is no small company bias in the findings since the average headcount of bankrupt companies was 620 and the median was 46, while for all 1 million companies that file Form 5500 in the U.S., the median headcount is 10. Figure 7 below shows the distribution of bankruptcy filers by number of employees (headcount) as filed in their Form Figure 7: Bankruptcy Filings in July 2015 by BQ Headcount 3. The average BQ revenue (estimate) for companies that filed for bankruptcy in July was $383 million and the median revenue was $21 million, indicating that these are not small companies. Figure 8 below shows the distribution by estimated revenue. Figure 8: Bankruptcy Filings in July 2015 by BQ Revenue (Estimate) 4. On average, a downward trend in the BQ revenue indicator (-24% in the previous year) was observed for these bankrupt companies. Copyright 2016 BizQualify LLC U.S. Patent Pending P a g e 9

10 5. For bankrupt companies with their own employee benefit plans, the average BQ Risk Score based on 100+ credit risk indicators (e.g., failure to make timely payments or failure to provide benefits in a retirement or welfare benefit plan) was 472, where 1,000 is the highest possible score and 523 is the U.S. median. Summary Statistics for November 2015 Bankrupt Companies that filed Form For the month of November, a total of 806 companies filed for bankruptcy, of which 62 filed Form Hence: Companies that DO NOT file Form 5500 are, once again, over 10 times more likely to declare bankruptcy. 2. The average headcount of bankrupt companies in November was 85 and the median was 20, while for all 1 million companies that file Form 5500, the median headcount is 10, indicating there was no small company bias in the November findings either. Figure 9 below shows the distribution of bankruptcy filers by number of employees (headcount). Figure 9: Bankruptcy Filings in November 2015 by BQ Headcount 3. The average revenue (estimate) for bankrupt companies was $29 million and the median revenue was $10 million. Figure 10 below shows the distribution by estimated revenue. Figure 10: Bankruptcy Filings in November 2015 by BQ Revenue (Estimate) 4. On average, a downward trend in the BQ revenue indicator (-17% in the previous year) was observed for these bankrupt companies, which could thereby serve as an additional indicator of corporate credit risk. Copyright 2016 BizQualify LLC U.S. Patent Pending P a g e 10

11 5. Companies that had filed for bankruptcy had been offering an employee benefit plan for 14 years (average) and 10 years (median). 6. For companies that filed for bankruptcy as well as filed Form 5500, the average BQ Risk Score was 443, where 1,000 is the highest possible score and 523 is the U.S. median. Summary Statistics for July and November 2015 Bankrupt Companies that filed Form 5500 Among all the 129 bankrupt companies that filed Form 5500 (67 in July and 62 in November), there was clearly no small company bias. The average headcount was 363 employees while the median was 32 employees. By contrast, the median headcount among all 1 million Form 5500 filers is 10. Figure 11: Bankruptcy Filings in July and November 2015 by BQ Headcount The average revenue (estimate) was $213 million while the median was $13 million among all 129 companies that declared bankruptcy and filed Form Figure 12: Bankruptcy Filings in July and November 2015 by Revenue (Estimate) Copyright 2016 BizQualify LLC U.S. Patent Pending P a g e 11

12 Conclusion: By leveraging a company s verifiable and auditable Form 5500 filings with the IRS and Dept. of Labor, wherein the company reports defaults and delinquency with respect to employee retirement and welfare benefit plans, BizQualify data and metrics are able to isolate the most credit-worthy, financially stable, and successful companies in the U.S. Furthermore, BQ data on foreign companies with U.S. operations (that file Form 5500) provides verifiable financial and credit information on these companies that is difficult to find by other means. BQ data is often compared to SEC filings (10-K and 10-Q financial statements) by public companies in terms of its accuracy and consistency; however, Form 500 filings are available for both private and public companies in a similarly systematic, auditable, and consistent fashion. The results of this bankruptcy study demonstrate that if a company does not file Form 5500 (i.e., it does not have its own retirement and/or welfare benefit plan), then that is in and of itself a significant unfavorable indicator. Simply put, companies that are financially healthy and stable are more likely to offer retirement and/or welfare benefit plans to their employees, and do so in a consistent and responsible fashion. Please contact Info@BizQualify.com to obtain a file with all the data underlying this study. Copyright 2016 BizQualify LLC U.S. Patent Pending P a g e 12