In trade credit insurance, you ultimately want to predict the likelihood that a company can pay his its supplier within due time. Credit analysts place a credit grade so that underwriters can decide more easily if they allow trade credit insurance coverage on a particular company or not. Many people still think that risk grading is based on just a handful of financial reports but this is not always sufficient to determine the financial health of a company.
A 360° approach to risk grading: why numbers are not enough?
A comprehensive approach
A credit insurer can’t just rely on figures and advanced algorithms to help assess credit risk. This It is very important to understand the specific context of each company and there are a number of factors to consider in order to determine a company’s financial health and its future risk exposure.
We asked Pieter Coussens, Sensitive Risk Manager at Allianz Trade to explain us the key things to look out for when determining the creditworthiness of your customer.
Is a risk analysis of a company limited to the analysis of economic factors and financial results for the business?
The financial analysis of a company's figures, together with an inspection of the macro-economic situation in which a business is evolving, can be the basis of the overall assessment. The interpretation of figures must also always be related to the activity of the company: same figures could be good for a trader and poor for an industrial company. After that, it is important to dig deeper and look for the "why" behind the facts. Why are there losses? Why are there payment difficulties? Why are we seeing rising bank debt? And the answer to "why" is best discovered through close contacts with the debtor. More importantly than the analysis, is the information that you receive directly from the business. Our in-depth relationships with businesses all over the world is what makes our Allianz Trade Grades so reliable.
Why should a company's structure, shareholders and management be taken into account as well? How can these factors affect the creditworthiness?
In assessing a business, an important point to examine is the shareholders and management and how strong they are. Shareholders determine how much capital they inject and leave in a company, indirectly reflecting how much confidence they have in their business. They also decide which strategy the company will follow. Management must likewise be able to demonstrate to us that their business model delivers an effective return. This can be discovered through effective conversation with them. In addition, we always investigate the linked companies as well as the holding company, because cash can always be transferred to other entities.
A company's customers and suppliers are also important. Why are they so important?
Every business has suppliers and customers, and you have to act as a reliable partner so you can look for solutions when sector challenges become visible. Ideally, your customers and suppliers will be sufficiently diversified, both geographically and sector-wise which is not always easy to realize. This will enable you as a business to be more resistant to macroeconomic shocks in one specific country (e.g. sanctions in Russia) or sector (scarcity of certain raw materials). The strength of your business depends partly on the strength of your customers. If your customers are experiencing difficulties, a domino effect is never far away. This is why we always ask CFOs whether they work with trade credit insurance themselves.
How do you determine a grade based on all these factors?
All Allianz Trade analysts around the world work in the same way. They must arrive at the final grade by keying in four factors, with each factor having a certain percentage weight.
These four factors are the following:
For each factor, you have to explain why you have assigned that particular value. This means that anyone using the grade can see at a glance why the final grade is good or bad.
How is the trend for the future determined?
In each meeting, the forward-looking factors of the company are explored. We consistently ask about forecasts and budgets and if possible the evolution of the order intake compared to the previous year. Where necessary, we try to obtain an actual list of their order portfolio. The rise in input prices last year led to some loss-making projects in some sectors, so it is crucial to know what risk mitigants are in place to cover that risk.
What are the necessary skills of a good Credit Analyst?
In my opinion, the most important quality of a good analyst is being able to listen well and process the information quickly. This enables you to challenge each response from the CFO with new questions. Like a small child, you must face each comment from the CFO with the word "why" in the back of your mind and keep questioning everything. In addition, you must also be able to form a good relationship with any type of CFO. You have to be able to build up a certain sense of trustworthiness so they are also willing to share bad news with you but also what measures they have installed to counter this bad news.
Do you have a question ?
Feel free to contact our team. They will be happy to help you.
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