How do you check on a company’s creditworthiness when the company is privately held and does not make its financial statements publicly available? The answer is that you need to check alternative sources of information for hints as to whether the company is experiencing problems. You need to ask the right questions and recognize the warning signs in the answers. It is recognized that the questions and actions recommended below may not be applicable to all privately held companies—especially smaller ones.

I begin with the following assumptions:

  • Bondholders and secured lenders have access to information to which unsecured creditors typically do not.
  • It is in the interests of bondholders and of secured lenders for the debtor to extract as much credit as possible from trade vendors. Their preference is for trade vendors to help finance the company through a period of financial stress or distress.
  • If secured bond prices or bank loan prices are materially below par, it may mean that the banks or bondholders do not expect to be fully paid in a liquidation.
  • If unsecured bonds are trading substantially below par it is likely that vendors are out of money in a liquidation of the debtor or in a Chapter 11 bankruptcy.
  • Bankruptcy newsletters contain valuable information. They report information that are signals that you need to pay closer attention to an account.