Credit Risk Part 3 of 3: Internal Risk Data

In the current economic climate, managing a credit rating and obtaining finance is more important and difficult than ever. It is vital that companies are provided with the right information from the market and credit rating agencies, to ensure their credit and risk evaluation shows them in the best light.

Part 3 of 3 Internal risk data (part 1 managing risk information, part 2 external risk data)

Internal risk information usually falls into 3 categories: strategic, financial and operational. Users of company risk information will be looking for, and expecting to find information under these headings, so make it easy for them by proving the information in this way:

Strategic
Risk assessors will be looking to see that the company strategy is well thought out, researched, tested and revised inline with real world developments and expected future events.  With this in mind; provide a commentary on changes to previous strategy or expected future changes and the reasons for this, explain how risk factors are being monitored and managed.

Some of the basic points to cover are:

• Market position of key products
• Ability to differentiate from competitors; maintaining a competitive advantage
• Product life cycle and distribution patterns
• Sourcing of key materials/ skills
• Ownership of IP and copyright benefits
• Trade or pricing regulation and litigation risk, changes in legislation or regulation
• Reliance/dependence on specific customers, suppliers or markets
• Outline of your current strategy, approach to risk management and business continuity plans

Financial
Start with a brief outline of the management and legal structure, major shareholders and stakeholders and the business plan. There should be a clear link between the company strategy and the business plan, if not, this should be explained. If specific developments or risks have been identified, model their effects, applying various scenarios to demonstrate how the situation would be managed to ensure compliance with loan covenants or other limiting factors, always include cash flows in this analysis.

In terms of figures, financial forecasts and company accounts will cover most expected data but cash flow will be of most interest to a risk assessor, so explain the key drivers and ratios including gearing and trend analysis.  Strip out any unusual cash flows such as share buybacks or exceptional transactions, explaining what you have done and why. Discuss the balance sheet, commenting on liquidity and like cash flow, strip out or highlight any distorting transactions. It may also be relevant to comment on the following: Contingent liabilities, pensions, onerous contracts or large capital projects as well as commentary on current finance including possibility of renewals or additional draw downs.

Operational
This is all about management, who they are, their track record and approach to risk. How have management reacted to previous unexpected developments? Have the changes made by management had an impact? If there are developments that may be seen to affect the company, it is probably wise to contact any parties that may be concerned by the news, be it creditors, banks or investors. Proactively advising of changes and what actions are being taken will be met with less scepticism. If there are concerns about releasing commercially sensitive information it is possible to put confidentiality agreements in place.

For further information on this topic please visit www.wardwilliams.co.uk or email enquiries@wardwilliams.co.uk