Coface Credit Rating

Gregory Mongrolle, Lead Analyst – Middle-East

Aman Union Seminar

04 04 2011

Coface Credit Rating - Agenda

● Coface Credit Rating (CCR) Scale

● Use of ratings for Coface

● Lists and types of companies to be rated

● CCR Production Standards: Main Principles

● Types of CCRs CCR with figures Quick Ratings Derived Ratings

● Ratings in the Middle-East Breakdown by countries Countries covered

Coface Credit Rating Scale

Use of Ratings for Coface (1/2)

Predictive of Default Rates

Use of Ratings for Coface (2/2)

● Improving risk management on significant exposures in credit insurance 35% of Coface exposure is rated Tool for monitoring risk (discriminating risk in a portfolio, actions during

crisis…) Calculating RWE (Risk Weighted Exposure) by confirming scores Permit to limit access to high risk products (minimum ratings for bonds, single

risk/buyer, factoring…)

● Derived uses: Probabilities of defaults, expected average loss + PMLs Statistical reporting on credit insurance activities Detecting unusual risks (high PMLs) – Solvency 2 Adapting the reinsurance system Calculating our economic capital requirement Improving our pricing

CCR Production Standards: Main Principles

● The production of CCRs is the mission of the Rating Line

● Risk management in Credit Insurance is the unique use of CCRs

● External Communication, even with the rated company, is forbidden

● The production process integrates contacts as often as possible with the rated companies to update figures and collect in-depth information. Additional information is collected from other public and confidential sources, proprietary to Coface or not

● Rating Analysts monitor the credit risk on rated companies

● Decision process requires the involvement of (at least) two pairs of eyes or a Rating Committee

Lists & types of companies to be rated

● Large existing exposure in credit insurance: Group of buyers with exposure > EUR 12Mn Buyers with exposure > EUR 6Mn

#14,000 companies to be rated (based on 31/12/10 exposure)

● Spot Ratings For large POTENTIAL limit: No need for rating For specific covers (as per UW standards) such as bonds, ceding risk for

factoring, single buyers, single risks By rating lines By BRE for Unistrat applications

Types of CCRs: CCR with figures (1/2)

● Use of Ratios

Evolution Ratios Evolution of Turnover Evolution of Turnover compared to the evolution of Fixed Assets Evolution of Turnover / (Current Liabilities – Cash) Evolution of Operating margins

Profitability and Economic efficiency Ratios Net and Operating margin Return on Assets Interest Coverage Ratio

Structure Ratios Leverage Ratio Debt Repayment Time ratio Liquidity Ratios

Types of CCRs: CCR with figures (2/2)

● Statistical Corrections Country Factor Industry Factor Size Factor

● Qualitative Corrections The activity and the market structure (e.g. competition, cyclicality, capital

intensive, price driven market) Company’s specific position (e.g. leadership, upward trend in the order

book, supplier or client dependence) Production & Products (i.e. internal and external constrains) Financing policy and contingencies (e.g. evolution of indebtness, source of

financing, payment incidents) Shareholder, Management & the State

Type of CCRs: Derived Rating (CCR derived from related company)

Coface thinks that in some cases it uses a rating as reference for closely linked companies/groups

●When rating a subsidiary (for which no figures are available) of a rated Group

If links between the companies are qualified as strategic investment or core business the Group rating can be extended to the subsidiary

Corrections may be applied making the rating deviate slightly from the Group’s rating (around 2 notches)

●When rating a Group (for which we have no figures), but we have ratings on core business(es) / strategic subsidiaries

If company(ies) rates represent a significant portion of the sales/assets, rating of subsidiary (weighted average rating of subsidiaries) may be applied to the group

Corrections may be applied to other facts known by the analysts and not reflected in the subsidiaries ratings

Types of CCRs: Quick Rating (CCR without figures)

No figure & no grid may be used as a reference

● Public buyers Country rating Experience

● Stand-alone company Country Rating Experience Assessment of the company’s environment Assessment of the size of the company Assessment of the company’s financial situation (e.g. doubts over

indebtness)

Ratings in the Middle-East: Breakdown by countries

Ratings in the Middle-East: Countries covered

Q&A