This blog is written and published by S&P Global Market Intelligence, a division independent from S&P Global Ratings. Lowercase nomenclature is used to differentiate S&P Global Market Intelligence credit scores from the credit ratings issued by S&P Global Ratings.

During a downturn, it is common for most firms to experience an increase in their probability of default (PD). However, even when the PD reaches a very high level for many firms, it does not necessarily mean that all of them will eventually default.

Since the past couple of years, many companies have faced business pressure due to rising interest rates. While a soft landing is now more likely for the global economy, risks remain due to the bumpy road toward low and stable inflation. The high-interest rate environment is expected to persist for a while. In such situation, it is critical to distinguish between firms genuinely at risk of defaulting and those that will successfully weather the storm.

S&P Global Market Intelligence’s Early-Warning Signals (EWS) framework is designed to provide timely warning signals for early detection of entities with genuine risk of default, expressed in an intuitive, semaphore-like colour scale.^[1] The framework is powered by RiskGauge^TM, S&P Global Market Intelligence's proprietary credit risk model, and combines a firm’s PD level and its change from a previous period with a set of dynamic thresholds that account for the economic cycle.

We look at Loyalty Ventures Inc. (LVI) to make our case. LVI was founded in 2021 and is based in Texas, United States. It provides consumer loyalty solutions, and offers marketing, customer, and rewards and redemption management services for sponsors.^[2] 

In September 2021, LVI was rated by S&P Global Ratings, but subsequently encountered continuous downgrades beginning in June 2022, due to underperformance in BrandLoyalty, inflation and expectation of weaker cash flows.^[3],[4],[5] On March 10, 2023, the company filed for bankruptcy, citing challenges due to geo-political tensions, inflation and high interest rates, and on the same day experienced a further downgrade by S&P Global Ratings from CCC+ to D. Figure 1 below shows the monthly EWS assessments in the two years period prior to the company’s bankruptcy.

Figure 1: EWS Assessments Trend for Loyalty Ventures Inc.

Source: S&P Global Market Intelligence as of March 21, 2024. For illustrative purposes only.

LVI’s RiskGauge score started from a green signal in March 2021 and remained low risk until December 2021, when it turned amber. Just one month later, a persistent red signal emerged, indicating ongoing high chances of a crystallization of a default event. The red signals appeared five months before the initial downgrade event (from B+ to B) and 14 months before the company filed for bankruptcy, allowing sufficient time for asset managers and risk analysts to take necessary actions.

As shown in this case study, the EWS framework can identify risky entities showing signs of imminent creditworthiness deterioration and default crystallization using an automated and timely approach. Whenever a red signal is generated, we recommend performing a deeper analysis with additional information available on S&P Global Market Intelligence’s Capital IQ Platform, checking company financials in more details, reviewing news and key developments, and performing a peer comparison analysis via RiskGauge Report, to confirm the signal, understand its drivers, and potentially reduce exposure towards the vulnerable counterparty.