December 21, 2024
American Tire Distributors' October 2024 Chapter 11 bankruptcy filing offers important lessons about which early warning signs truly matter in predicting corporate defaults. While conventional wisdom focuses heavily on payment patterns, ATD's case demonstrates why we need to look deeper at structural indicators.
Surprisingly, ATD maintained relatively stable payment behavior right up until its bankruptcy filing. Their Days Beyond Terms (DBT) was just 3 days - actually better than the industry average of 3.12. Even more telling, they were consistently paying most vendors on time through September 2024, with only slight delays in transportation payments appearing in April 2024. Of their $222.3M in outstanding balances, 96.8% was current or within 30 days.
The chart above reveals a dramatic story that traditional credit metrics missed. ATD's financial trajectory shows a rapidly declining revenue pattern starting in November 2021. Credit Pulse has specialized data that informs credit teams of the financial health of private companies, even when financial statements are not provided.
Two critical cautionary UCC filings appeared in 2022-2023, suggesting ATD was pledging additional assets as collateral:
ATD's year-over-year business spend showed concerning trends:
This pattern often signals a company entering a death spiral - cutting core operational expenses while increasing spending on consultants and restructuring advisors.
The bankruptcy filings revealed dangerous concentration among key suppliers. Their top 5 creditors alone were owed over $363 million:
Multiple leadership changes occurred in critical roles including CFO and key director positions, often a sign of internal turbulence.
ATD's case demonstrates why traditional trade payment data, while important, shouldn't be viewed in isolation. The company maintained relatively normal payment patterns even as core financial metrics were collapsing. Modern credit analysis requires examining structural indicators such as:
The key is developing a holistic view that weighs multiple risk factors rather than over-relying on any single metric. In ATD's case, the sustained downward trajectory in key financial metrics from mid-2023 onward was a much clearer warning sign than payment patterns, which remained stable until just before the bankruptcy filing.
What early warning signs do you look for when assessing credit risk?
[Note: All data sourced from ATD's October 2024 bankruptcy filings and CreditSafe reports]
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