Jewelers See Worst Quarter for Credit Downgrades
The Jewelers Board of Trade (JBT) reduced companies’ credit scores at an “unprecedented” rate in the second quarter as businesses missed payments during the Covid-19 crisis.
Many jewelers that bought on terms of 90 days or less before the pandemic were unable to meet their obligations to suppliers because revenues dried up during lockdowns. As a result, the JBT downgraded 1,705 companies across the US and Canada during the three months ending June 30, compared with 1,130 a year ago, it reported last week.
“Think about when this all started — now you’re beyond the 90 days,” JBT president Erich Jacobs said Monday in an interview with Rapaport News. “We would expect July to be even worse.”
The total was the highest "in recent memory," but has been larger in the past when the industry was much bigger, Jacobs noted. However, this was the most drastic quarter on record relative to the number of increases, as the organization usually raises and lowers a roughly equal number of ratings during a given period. It only upgraded 826 companies in the second quarter — under 50% of the total downgrades.
“The ratio of decreases to increases is definitely unprecedented, and worse than what we saw in the 2008-to-2009 period,” he said. “This isn’t surprising, as 2008 was more of a slow fade, whereas this was a full stop of many payments.”
The JBT largely bases its credit scores on how promptly companies pay for goods, using information members provide about their trades with customers. More than 100 days have passed since the Covid-19 shutdown began in the US in March, leaving buyers increasingly vulnerable to a downgrade, as suppliers aren’t getting their money.
The board has kept its ratings methodology unchanged during the pandemic. However, it now publishes a parallel “pre-coronavirus” score on every credit report to show how a company was performing before the crisis.
Still in business
Despite the upheaval, only 90 US jewelry businesses exited the industry during the quarter, versus 185 a year earlier, according to JBT data, mainly because it’s become difficult to establish whether a company has shut forever.
“For us, when they’re a ceased operation, we say with 100% certainty they’re gone, because it has implications for [debt] collections,” Jacobs explained. “[The investigation process] involves things like sending them snail mail and seeing if it comes back, checking with phone calls over and over again, and in many cases, such as in a strip mall, checking with their neighbors to see if they’re closed. That particular process is taking a lot longer to do in this environment.”
Often, the neighbors are shut too, and many companies themselves don’t know whether they’ll return to business, he added.
Meanwhile, only seven US companies entered bankruptcy, the same number as during the second quarter of 2019. Bankruptcy courts have only just reopened, creating a significant lag as insolvent companies have been unable to complete the legal process, Jacobs observed.
The entire US industry shrank 3.9% year on year to 24,233 companies across jewelry retail, wholesale and manufacturing.
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