Norway UNDERSTANDING CREDITSAFE COMPANY RATING & LIMIT NORWAY

Transcription

1 Norway UNDERSTANDING CREDITSAFE COMPANY RATING & LIMIT NORWAY

2 Introduction to Creditsafe Rating The Creditsafe Rating Model is a highly predictive analysis tool that that uses the latest advanced statistical techniques and group companies in five bandings based on scores. It combines commercial and other key information, including debt collection data, public information, key financial ratios, industry sector analysis and other performance indicators which, provides a view of your current and future customers risk. What does the Rating Model predict? The Creditsafe Rating predicts the likelihood of a company failing within the next 12 months. In other words, this model was built to predict: Which Norwegian companies are likely to fail? What is the definition of fail? Creditsafe considers the following criteria to be the definition of failure:» Bankruptcy» Liquidation» Administration» Compulsory dissolution» Enforced composition» Case sent to probate court» Acquisition merger» Debt negotiations 2 UNDERSTANDING CREDITSAFE RATING & LIMITS

3 What does the Creditsafe Rating mean? The Creditsafe Rating acts in such a way that each one of the 1 to 100 Scores directly correlates to a relational level of risk. The high predictive power of the model can efficiently distribute the bad companies to low scores (higher risk); while in contrast, higher scores are populated by highly creditworthy companies. What are the Creditsafe Rating Bandings? The Creditsafe Rating Bandings is an easy-to-use segmentation tool which group the Norwegian company population into five bandings. The connection between the likelihood of becoming insolvent (fail) and the five score bands is related to real-world statistics; resulting in a meaningful classification of credit risk. This classification of credit risk does not depend on population percentages, but on population percentages of failure. When Creditsafe applies a risk score to a company it first identifies the type of company and the size of the business. The reason for this identification is that all companies will be rated on a module which is used for other companies of a similar size. 3 UNDERSTANDING CREDITSAFE RATING & LIMITS

4 How was the Rating Model Created? The Creditsafe Rating Model was created by our analytics team who looked at companies that failed over the last 12 months and assessed the commonalities within these failures. Our team analysed hundreds of variables, including the weighting and specific impact each variable had on distinguishing the failed from the non-failed businesses. The most significant variables were selected for model development. What are the different company segments? Companies come in all shapes and sizes from the local gym to Telenor ASA. So that we score companies appropriately, we divide the companies into distinct, but homogenous segments. Every business is segmented in different models based on legal form, age, size of operations and the information that is available. Our rating is based on nine number of models. Example: Private Limited Companies (AS) New Companies Small Companies Medium Companies Large Companies Real Estate Companies Public Limited Companies (ASA) Sole Proprietorship General Partnerships Other companies 4 UNDERSTANDING CREDITSAFE RATING & LIMITS

5 What factors are used to score a company? New, Sole Proprietorships and General Partnerships Companies Model Examples of characteristics used in the models:» Firmographics: Such as the Industry code» Payment performance: Using debt collection and other negative payment data» Negative information on the directors: Severe remarks of payments» Share capital (New AS companies only) Small, Medium, Large and Lower Risk Companies Models Examples of characteristics used in the models:» Financial Data: Profitability and leverage ratios. Indicators of a company s current position, i.e. liquidity ratio, auditors remarks.» Industry Analysis: Looking at the industry the business trades in as certain industries have a greater risk of insolvencies than others.» Payment performance: Using debt collection and other negative payment data.» Other: Changes in the board, age of the business etc. Real Estate Companies Model Examples of characteristics used in the model:» Financial Data: Profitability and liquidity ratios as well as auditors remarks.» Company age: Using the length of time the company has been trading for.» Payment performance: Using debt collection and other negative data Utilising debt collection data These segments allowed us to build statistically proven robust models, which employ an automated scoring system for better credit risk decision making. These models asses the risk of failure based on a wide range of factors that include some financial elements and other more current elements, which are proven risk indicators for AS companies, such as Group influence and debt collection data. 5 UNDERSTANDING CREDITSAFE RATING & LIMITS

6 What is the Creditsafe Probability Table? The Creditsafe probability table below, is an analysis tool that helps set the internal acceptance criteria to assess company credit policy and risk. Cumulative Statistics Score Range Statistics Score band Score range Acceptance rate Bad rate % Bads excluded Score range Bad rate % population A % 0.00% % % 0.28% A % 0.02% 99.97% % 2.56% A % 0.03% 99.86% % 4.51% A % 0.07% 99.43% % 6.42% A % 0.12% 98.40% % 8.51% A % 0.16% 97.17% % 8.66% B % 0.20% 95.43% % 9.19% B % 0.25% 92.75% % 9.23% B % 0.32% 89.44% % 8.65% B % 0.38% 85.50% % 8.02% C % 0.47% 79.97% % 7.95% C % 0.57% 73.46% % 6.71% C % 0.70% 64.81% % 6.03% C % 0.83% 56.08% % 4.53% C/D % 1.04% 41.95% % 5.01% D % 1.22% 31.05% % 1.75% D % 1.31% 25.60% % 0.52% D % 1.43% 18.41% % 0.56% D % 1.57% 9.93% % 0.49% D % 1.73% 0.00% % 0.43% How to read the probability table The highlighted row has cumulative rating range of and a rating range of 41-45, which is used as an example below. Cumulative Statistics At the Rating of 41 and above, 80.68% of the accounts are accepted. Expected bad rate for the accepted portfolio is 0.57% Score Range Statistics The score range of represents 6.71% of all accounts. The bad rate is 1.68% for this rating band. In this rating range, there are 60 good companies for every failing company. 6 UNDERSTANDING CREDITSAFE RATING & LIMITS

7 The Credit Limits Credit limits are applied to New, Small, Medium, Large, ASA, Real Estate and Low Risk companies. What is a credit limit?» The credit limit is our recommendation of the total amount of credit that should be outstanding at one time.» It is estimated using the Risk Weighting and key balance sheet figures for companies that file accounts.» Non-financial information is also used to calculate a recommended credit limit, when companies do not file accounts. What is a Risk Weighting?» A formula converts the score into the risk weighting, which is later used for the calculation of the credit limit. As companies with higher scores represent lower risk, they will be given a higher risk weighting, and vice versa. The extent of credit is thus related to the level of risk. What is the maximum credit limit?» For companies with financials scored 30 and above: 1000m NOK» New companies scored 30 and above: 10,000 NOK» For all companies scored below 30: Credit not recommended When can a company have no rating? When a company has ceased to trade, or is exposed to high or uncertain risk, it is not scored. Instead of a rating, the company receives an explanation to why the rating is not calculated. Examples: Company has failed (bankruptcy, liquidation reconstruction etc.). Annual accounts are missing or overdue Debt balance, distraint or other severe payment remarks. Status information on the company (merger, deleted, inactive etc.) Companies of specific legal forms or very limited information Missing board members 7 UNDERSTANDING CREDITSAFE RATING & LIMITS

8 Appendix Full PoD table Band Score Prob Band Score Prob Band Score Prob D % C % B % D % C % B % D % C % A % D % C % A % D % C % A % D % C % A % D % C % A % D % C % A % D % C % A % D % C % A % D % C % A % D % C % A % D % C % A % D % C % A % D % C % A % D % C % A % D % B % A % D % B % A % D % B % A % D % B % A % D % B % A % D % B % A % D % B % A % D % B % A % D % B % A % D % B % A % D % B % A % D % B % A % D % B % A % C % B % A % C % B % A % C % B % A % C % B % C % B % 8 UNDERSTANDING CREDITSAFE RATING & LIMITS