In the formulation of this score, the highest weight is given to the DBT risk (90 days beyond term on outstanding debt, which is the shortest-term risk), then to the viability risk, next to the financial risk, then area risk, and last to the industry and Z-score risks. The score is based on the following algorithm:

CoreLogic Score = ∑ (.30*DBT+.25*Viability+.20*Financial risk score+.15*Area risk score +.05*Industry risk+.05*Z-score)

Financial risk score measures the general financial condition of a business based on a number of credit measures that include typical elements used in credit scoring: UCC filings, derogatories, payments outstanding, etc. This measure is basically an interim risk score for a business, covering approximately the next 1 to 2 years. This compares with traditional scoring used by companies that rate and score business performance.

Industry risk score contrasts risk in a business’s industry against that of all other industries. In many cases this risk determines or considers how much credit can be granted or allocated among industry groups. Industry risk score measures the overall risk for the industry.

Industry risk uses the debt-to-equity and overall risk in the SIC and compares it to how bank rules allocate funding. Banks establish a company’s debt-to-equity ratios based on the nature of the industry and associated business models; e.g., a leasing company would be given a higher debt-to-equity ratio compared to a restaurant based on what is needed to run the business coupled with their ability to pay.

Area risk score tracks the market and competitive conditions over time in the business’s served markets. This risk determines the impact of potential economic risk to the business within the zip code and contiguous zip codes served by the business and its peers.

The area risk score is comprised of a number of factors that impact both consumer credit scores and industry scores in a geographic area. Some of the variables include trends in consumer income and spending which in turn impact sales of businesses dealing directly with consumers and eventually those firms that supply consumer businesses. The consumer spending patterns are also impacted by the nature of household size, education levels, and house occupancy. Additionally, the general health of the local economy is reflected in the overall attrition rates of businesses within an area.

Viability risk is a longer-term risk score that measures the characteristics of the business’s markets, competition, etc. In part, viability risk compares the number of competitors and the rate of change in the number of competitors. It also looks at the peer group growth and stability and degree of risk in the served area along with attrition of similar businesses. In essence, it determines the potential financial sustainability of the business.

DBT (days beyond term) risk score measures the relative potential for a business’s payments on outstanding debt to go beyond 90 days. Typically, in most businesses when days beyond term exceed 90 days, the business is turned over for collection and/or written off. DBT risk is an industry standard in financial stress risk.

The Z-score is a linear combination of five common business ratios weighted by coefficients. The Z-score is a private company risk score that was developed by NYU Professor Edward Altman, Ph.D. It measures the relative likelihood of a business facing potential bankruptcy in the next three-year period. Measurement is based on the normative data for the firm within an industry, size, and geographic location.

Z-scores are used to predict corporate defaults. If a company has unstable earnings and high debt, the company is a candidate for bankruptcy. In academic studies, Z-scores are easy-to-calculate control measures for the financial distress status of companies. In a series of tests covering three periods over 31 years, the model was found to be approximately 80%–90% accurate in predicting bankruptcy one year before the event, with a type II error (classifying the firm as bankrupt when it does not go bankrupt) of approximately 15%–20% (Altman, 2000).

Z-Score Estimated for Private Firms

T₁ = (Current Assets − Current Liabilities) / Total Assets

T₂ = Retained Earnings / Total Assets

T₃ = Earnings before Interest and Taxes / Total Assets

T₄ = Book Value of Equity / Total Liabilities

T₅ = Sales / Total Assets

Z-Score Bankruptcy Model

Z = 0.717T₁ + 0.847T₂ + 3.107T₃ + 0.420T₄ + 0.998T₅

Zones of Discrimination

Peer groups were developed to allow evaluation comparisons among similar businesses with respect to geographies, industries, and business sizes. These groupings were devised based on four-digit SIC groupings within eight sales ranges and within zip code areas. The peer groups typically contain between 250 and 2,500 businesses in an area.

The sales ranges of these groupings include the following:

Overall, 50,000 peer groups were developed. Risk scoring and distributions were developed for each of these peer categories on a national level so that individual businesses can be compared to their appropriate norms.

Note that the industry and Z-Score distributions are based on a national distribution level for the industry and sales range, so they have similar peer scores for national and individual groups.

The relationship of a peer group to its companion groups provides an indication of the consistency of these groups nationally. The greater the consistency among these groups, the more predictable the risk of a specific member is regarded.