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Credit Risk Case Study: Brookstone, Inc. – Proven Default Indicators

In 2013, the average total asset filing for Consumer Discretionary companies was $145 billion per bankruptcy – 36% higher than Consumer Staples and 112% higher than Utilities, which only had one. This information coupled with the fact that Consumer Discretionary companies top the chart for filing for bankruptcies with 112 last year alone makes this a significant trend.

Within Consumer Discretionary Specialty Retail is historically very cyclical and has high PD’s. However, we have specifically identified Catalog Retail, a Specialty Retail Sub-Sector, to have prolonged high PDs. The final PD of 1.832% can be mapped to a bb- credit score for both department stores and catalog retail.

Assessing credit should not be done using a single tool or analytics. Rather a holistic view of risk with a spectrum of risk measures. Taking a private company as an example, we use the Probability of Default Fundamentals model which shows a 37.1% PD increase for Brookstone Inc. and a one notch score deterioration in the CreditModel score: signifying deteriorating credit way before the company announced that it was contemplating Bankruptcy back in February 13th 2014.

Such tools, can warn you of deteriorating credit in time for one to make appropriate actions

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