The Jewelers Board of Trade (JBT), the industry’s credit reference bureau, is “enhancing” its credit rating system to give its members and the industry more data to assess the credit risks of accounts listed with it. Specially, starting January 2006, it will use new “Other Condition” codes and, for the first time, its numerical “Payment Scores” (including an added one) to describe a company when a capital rating can’t be assigned to it.
“Our members have told us they wanted added information for evaluating the credit worthiness of the companies we track, and we believe these enhancements are a significant step toward accomplishing this task,” says Michael J. Poissant, JBT board chairman. “Thus methodology is more comprehensive and complete, more timely and consistent,” adds Dione D. Kenyon, JBT president.
All 70,000-plus accounts in JBT’s database will carry some type of credit information, either a rating, or a payment score and description. That includes every one of the 32,700 listings in JBT’s “Red Book” reference guide. Currently, only one in four there (23%) are assigned capital ratings. The rest are non-rated, or blank, due to unavailability or inadequacy of financial data.
The updated criteria will be published in a special CD-rom edition of JBT’s Red Book, mailed free January 2006 to all JBT members; in the March 2006 print edition of the Red Book; in JBT’s weekly Service Bulletin (also available on its website as part of its membership services), and on all JBT credit reports.
Main changes. There are two main changes in JBT’s rating system. The blank (non-capital) rating is replaced by 10 “Other Condition” ratings, using three-letter codes to show why a capital rating isn’t assigned. For example, FIN stands for lack of current, or complete, financial statements, while NEW is for a business under three years old.
The other change is using JBT’s Payment Scores if JBT has adequate trade references on file for a company and a sufficient track record for JBT to monitor. To the Scores’ familiar 1- 4 system (based on promptness of payment), JBT has add “0,” when there’s not enough trade information about a company, no JBT track record, or it’s in bankruptcy/receivership. NEW4, for example, stands for a new, slow-paying company.
The rating changes are explained in the amended rating key and guidelines in JBT’s Red Book. JBT staffers can also explain the changes. (JBT’s “Capital Ratings” remain unchanged as does its definition of “Ratable Capital.” It still requires adequate financial disclosure, a track record in business, a minimum listing period with JBT, and some other prerequisites for capital rating consideration.)
Reasons for change. “In recent years, members told us we weren’t providing enough ratings information for them to make credit decisions [about a company],” says JBT’s Kenyon in explaining the revisions. “That was because often we didn’t have sufficient financial information to assign a capital rating to a company (because it refused to provide it, was new or bankrupt). At the same time, others mistakenly assumed a ‘blank’ rating meant an account was a good risk – or not.”
JBT’s board began looking at the issue a couple years ago, about the same time JBT implemented its new credit report format.
“We realized that even without assigning a capital rating, we had plenty of information in our data base (2.5 million credit references a year) to describe a company and how it pays its bills,” says Kenyon.
JBT focused on better describing “blank rated” accounts (three-fourths of Red Book listings), while keeping as much of the current system as possible. Last year, JBT’s board and staff, plus a JBT member user group, designed and tested ways to simplify and effectively incorporate more information and also studied other credit bureaus. Aiding this, adds Kenyon, was a major upgrade of JBT’s computer technology–its first in 25 years—”giving us the flexibility to do more with the data our members provide to JBT.” JBT began testing its enhanced rating criteria early this year.
Benefiting many. The obvious benefit of this more comprehensive system is that ‘it helps people distinguish better between levels of credit risk in making their credit decisions,” said Kenyon. But there are other advantages, too, she noted.
It will spotlight companies with good payment records, even if they have no capital rating because they don’t disclose their financials—as well as those who don’t pay so promptly. There will be a increase in rated accounts with descriptive conditions and/or payment scores, providing more information for members and the industry to assess relative credit risk among accounts. From a marketing perspective, expansion of the rating system gives members more options for mailing lists, which are better segmented now—not only by geographical location, but also by Payment Score, Capital Ratings and (new) Other Condition codes–to reach target markets.