10 Hiding Places for Business Credit Risk
Atradius Trade Credit Insurance has developed this list
of 10 Hiding Places for Business Credit Risk to help
financial professionals spot unseen credit risk. Atradius
Trade Credit Insurance is the U.S. arm of Atradius
Group, one of the world leading credit insurers.
Atradius suggests financial professionals look beyond
the figures issued in corporate financial statements,
to also evaluate the following areas when assessing
business credit risk:
1. Capitalization – Evaluate how the firm is capitalized
and if it has access to future capital. Determine
sources of capital and how the capital is structured.
2. Loss on Derivatives – Find out if complex hedging
strategies are in place that may not be actual hedges.
Determine if derivatives used are liquid and if there are
“naked†positions.
3. Mark-to-Market Accounting – Ensure derivative
positives in place are valued correctly and find out
valuation rationale. Determine if rationale has material
impact on financials.
4. Managing Leverage with New Forms of Debt –
Determine if convertibles that look like equity actually
act as debt triggers.
5. Goodwill and Intangible Valuations – Assess if
valuations are accurate and what assets are being
valued and at what price. Check to see if big
write-offs are coming.
6. Off Balance Sheet Transactions – Determine
if there are operating leases that should be capital
leases or capital leases that should be operating leases.
7. Calculating Pension Liability – Reconcile
estimated needs with the projected returns and
see if projections are realistic. Evaluate how options
are treated.
8. Financial Engineering with SPEs and JVs –
Find out if companies are being set up to assist in
product financing to customers of the parent and
determine the effect on the parent if the entity fails.
9. Engineering with Mergers and Acquisition
Activity – Establish if any mergers or acquisitions
impacted the firm’s overall debt/risk ratio.
10. Revenue Recognition and Measurement –
Determine if company is booking future revenue in
current periods for long-term contract deals and if
unrealized revenue is being calculated correctly.
Check to see if swap transactions overstate revenue
and add no realized value. Assess how currency
value affects earnings.
A growing number of companies in the U.S. are
turning to business credit insurers for highly
specialized trade credit underwriting expertise
and their ability to dig deep into company balance
sheets to uncover credit risk that is often not
readily perceived.
