Foundations of Financial Risk by unknow

Author:unknow
Language: eng
Format: epub
Published: 2015-06-03T13:03:47+00:00

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FOUNDATIONS OF FINANCIAL RISK

5.7.4 Liquidity Issues

The one overriding objective in assessing credit risk is to evaluate whether a loan will be serviced and repaid in cash on schedule. Both liquidity (does the company have the internal sources of cash to service and repay the debt when due?) and solvency (does the company have access to alternative sources of cash flow, e.g., through asset sales or capital contributions to meet its interest and repayment schedules?) are fundamental issues that must be addressed early in the credit process. Through the credit monitoring process, careful attention should be paid to a company’s liquidity position. Increased use of overdrafts, lateness in paying trade creditors, and decreasing cash balances may all signal a weakening liquidity position and a potentially increased probability of default.

5.7.5 Industry/Peers

Certain industries or sectors develop reputations for corruption or unethical practices. When uncovered, such actions may result in large fines, tarnished reputations, and loss of public confidence. This in turn may lead to a ratings downgrade and or a widening of a company’s credit spreads, the difference between the yield on (risk-free) government bonds and the company's bonds of similar structure, both of which will have implications for the risk profile of the portfolio.

EXAMPLE

In September 2014, a Chinese court found a local subsidiary of UK pharmaceutical company GlaxoSmithKline plc (GSK) guilty of bribery, and fined the company RMB 3 billion (approximately USD 492 million)—at that time, the largest fine imposed by a Chinese court. The Chinese authorities accused GSK of bribing doctors and hospital officials to use GSK products. The case highlights the potential dangers to a company negotiating in countries where what is acceptable with regard to local practices may be unclear, and where a change in government may result in local laws being enforced more rigorously than had been the case in the past.

5.8 Remedial Management

Workout units are specialist teams that manage a bank’s problem assets.

Executed well, their efforts can avoid painful losses to a bank or even gen-

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