*
Company A $295,396,000 $261,201,000 124*
Peer Average
51.3 D Cash
51.3 $261,201,000 $122,002,230
+$173,393,770
Equals 295.4M/261.2M x 90(or number of days in sales period)
Credit Risk Management
Enhancing Your Bottom Line
Credit Background
Thorough identification and accurate measurement of credit risk, supported by strong risk management can help improve the bottom line …..An uncertain and volatile economic environment significantly impacts this ability …..The desire to grow and turn in outstanding results has a tendency to put pressure on the checks and balances within businesses
Reporting
The business strategies and objectives drive the establishment of credit policies and procedures. Measurement and reporting as well as the use of current technologies enhance credit decision-making and improve risk management. The entire process is continually re-evaluated and improved.
The measures drive value creation and should support problem identification and correction.
Credit Risk Management’s Inter-related Activities
CREDIT POLICY Origination
Technology & Data Integrity
Reassessment Credit Strategy & Risk Tolerance
A New Paradigm
A new business paradigm had evolved: causing a lack of reliance on good fundamental analysis The idea that stock market values would continue to go up indefinitely Increasingly competitive, complex and volatile market place Higher than expected actual debt burdens Extensive reliance on unrealistic future cash flows Failures in corporate governance Questionable personal and corporate ethics
Performance-based management utilizes metrics that measure actual performance against predetermined thresholds. The thresholds are established taking into account the organization’s strategy, operating environment and process controls.
Note also that Critical Suppliers to the company may pose specific credit risk
DSO Impact … an example
Actual Q3 A/R Q3 Sales \ DSOs = Hypothetical DSOs Q3 Sales \ Q3 A/R =

Analysis

Risk Mitigation
Objectives Type of Exposure
Business/ Industry Financial Credit

Credit Scoring and Ratings
Instruments or Methods
Performance Management
RISK MANAGEMENT
Disposal / Risk mitigation
Recoveries
Collections
Customer management
Portfolio management
Credit Decisions
Compliance
Transactions Collateral management
Credit Strategy & Risk Tolerance
Credit Strategy Statement and
Risk Tolerance
Coordination with Business
Specific Quantifiable Objectives Management Review
Credit as a Facilitator
Credit risk management is important
Credit is a facilitator of business growth and performance High business margins tend to attract lower quality clients and therefore higher risk profile to manage Clients (buyers) may be concentrated in selected industries and provide limited portfolio diversification opportunity Poor credit risk management resulting in negative impact to bottom-line is heavily penalized by markets
Pricing & terms
Credit limit
Collateral acceptance Contracts & Documentation
Credit Risk Management
A complete and coherent risk management framework contains the following elements
Sales channels
Reporting
Credit Analysis
Financial analysis Credit analysis Exposure aggregation Risk rating Credit scoring Exposure measurement Management reporting
Value Proposition
Credit plays a critical role in “selling” products and services
Expands revenue opportunities with creditworthy, incremental customers Utilizes innovative structures to support business relationships Effective credit risk management limits credit losses and provides stable cash flows and earnings Marketplace rewards companies exhibiting earnings and cash flow stability with higher P/E multiples Marketplace penalizes credit induced volatility and “surprises” Raises questions about quality of management
Project Finance Structured Transactions Leases with Recourse
Derivatives Exposures
FX, Interest Rate Risk, k
Parent or Third Party Guarantees Commercial and Standby Letters of Credit
Credit Policies & Procedures Credit Strategy & Risk Tolerance Governance, Control and Implementation
Measurement Methodologies
Analysis & Risk Management
Monitoring/ Control Exposure Management Aggregation Control Periodic Account Reviews Payments/Aging Credit Condition Compliance with Covenants, Terms Technology/Reports Transactions/ Bookings Risk-adjusted Return