Assessing your customers credit worthiness

Transcription

1 Assessing your customers credit worthiness Mike Buggy Risk Underwriting F4G event 19th November 2014 Department / author 1

2 Bad Debt and Insolvency Matters... 40% of a Company s assets are typically in the form of its outstanding sales ledger 2

3 Sector and Buyer risks: the importance of Information There is much more than financial accounts and payment experience Deteriorating Financial Performance Profits Warning Performance Against Expectations Press Reports Introduction Of Reporting Accountants Change In Ownership Acquisition/ Disposal Buyer Risk Restructuring Ageing Debtor Profile Change In Funding Structure Supplier Creditor Pressure Unexpected Change of Management Changes In Security Increase Cost Of Debt Breach Of Covenants 3 3

4 How do we assess trade credit risk? Copyright Euler Hermes 19/11/2014 4

5 Country risk assessment What do we measure? How do we measure it? Payment disruptions by a company in a given country that are outside the control of companies COUNTRY RATING AA1 D4 MEDIUM-TERM RATING Economic risk Political risk Structural Business Environment Macroeconomic imbalances: level of development, structure of output and trade, long-term growth Political risk indicators: mechanisms for orderly transfers of power and succession process, concentration of power, effective policymaking, independence of institutions, social cohesion, international relations Business climate indicators: regulatory and legal framework, control of corruption and the relative ease of doing business SHORT-TERM RATING Commercial risk Financing risk Business cycle: GDP + insolvencies + payments experience Financial vulnerability: Sensitivity to swings in capital flows and political capacity to respond effectively 5

6 Sector risk assessment Sector risk grading: how does it work? 4 levels of risk to assess the risk of nonpayment by a company in a given sector in a given country. Countries covered Sectors covered Methodology Contributors 72 countries covered 17 sectors covered - Quantitative and qualitative approach - Use Euler Hermes internal data - Hard data from secondary sources indicators are updated quarterly Microeconomic expertise of Euler Hermes group credit analysts, who closely monitor risk in companies in all countries, and sector advisors, who analyze industry trends globally. Low risk: sound fundamentals ; very favorable or fairly good outlook. Medium risk: signs of weaknesses; possible slowdown. Sensitive risk: structural weaknesses; unfavorable of fairly bad outlook. High risk: imminent or recognised crisis. 6

7 Corporate Risk Assessment The EH Grading system Exceptional Very strong Strong Good Average Watch Weak Distressed Uninsurable Failures Virtually no risk of loss Minimal risk of loss Low risk of loss Below average risk of loss Average risk of loss Above average risk of loss Increased risk of loss High risk of loss Very high risk of loss Good credit grading of a company and/or sector low default probability Bad credit grading of a company and/or sector high default probability Copyright Euler Hermes 19/11/2014 7

8 Grading Methodology COMPONENTS SUB GRADES LIMITING FACTORS ADJUSTMENT FACTORS Ownership & Strategy Adverse Overdue Company s Forecast Outlook Revenue & Profitability Liquidity & Financial Leverage Valid Claims Age of the company Trade Sector / industry Trends Competitive Position Cash Flow & Coverage Sole Trader Order Book Status High Customer Concentration Economic & Geopolitical High Supplier Dependency Copyright Euler Hermes 19/11/2014 8

9 How Credit Insurers relate to the business world Euler Hermes Secures Trade at Home and Abroad 9

10 Checklist for Advanced Credit Management Credit Management computerised and centralised where possible Always request written applications from potential customers before opening a credit account Establish Credit limits and review regularly Always quickly review credit limits if exceeded Financial analysis is key to credit management so grade your customers Terms and conditions should be clearly communicated to customers Strong follow up on invoices Deliveries are automatically put on stop if there is an overdue Authorities are defined for credit and sales personnel Only the credit department can overrule a credit limit Collection procedures defined whenever there is an overdue Establish a comprehensive written credit policy 10

11 Credit Insurance Solutions for companies of all sizes World Program - Customized solutions for international groups Excess of Loss (XoL) - Customized policy for larger corporations with integrated credit - Management department; only large risks are underwritten Policies for medium-sized to large companies - Customized policies covering domestic and export business Policies for SMEs - A simple policy, easy to manage Copyright Euler Hermes 19/11/

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