A solution for the assessment of credit risks

From left to right: Evert de Vries (Zanders), Ruud Korff de Gidts (BvD), Lode Debackere (BvD) and Richard Roering (Zanders).

A solution for the assessment of credit risks

EAGLE: European corporate rating model

In case companies receive large orders on a regular basis, it is important to know whether the other parties involved are capable of meeting their obligations.

However, determining the creditworthiness of companies requires considerable knowledge of risk models, the appropriate software and access to a substantial amount of specific data.

Since not every company has access to all of these relevant elements, in a close cooperation Zanders and Bureau van Dijk have developed an advanced solution that brings together models, software and data.

For many years, relative to other risks faced by companies, credit risk had a low ranking on the list of priorities. The crisis caused a paradigm shift, however. An increasing number of organizations is currently discovering that managing credit risk has a clear added value.

After all, every entrepreneur who does business with varying counterparties would like to know to what extent the customer is capable of meeting its obligations, i.e. paying amounts owed. Clear insight into the credit risks enables companies to address these risks in a consistent and focused manner and prevent a threat to their own financial strength.

“The addition of more models is possible if required by a customer.”

Usually, large financial service providers have departments that continuously develop and improve models to monitor the creditworthiness of their customers and manage the related credit risks .

Within the business community as a whole, however, thinking in terms of credit risk is less common and, unsurprisingly therefore, organizations rarely have adequate knowledge necessary to assess or even rate a customer’s creditworthiness in-house.

For this reason, Zanders and Bureau van Dijk (BvD), a leading publisher of business information, joined forces to develop a solution that would allow companies to rate their customers in a reliable way and provide a consistent insight in the risk profile of these counterparties. Originally Belgian, BvD is now an internationally operating company with approximately 460 employees in 25 countries.

Zanders and BvD jointly developed the EAGLE (Expert Advanced Global Lending Engine) rating model. This powerful solution provides the means to assign a credit rating to virtually every European company with an annual turnover in excess of EUR 10 million. The solution therefore meets a growing demand. According to Lode Debackere, BvD’s director of sales and marketing for customized solutions, a number of large international companies have already markedly improved their credit risk management in the last 12 months.

Together with his colleague, project manager Ruud Korff de Gidts, Debackere was closely involved in the creation of the EAGLE rating model. “At the present time, the rating model is suitable for larger companies that wish to determine credit ratings and the associated credit risks with respect to their customers,” Korff de Gidts explains.

A solution in three parts

The total solution consists of three parts: a technical platform, an impressive database of business data, and an advanced credit rating model. The technical platform and database are BvD products. Known as FACT, the platform is a comprehensive tool for credit risk management processes. This tool is linked to AMADEUS, a database containing the financial information of over 15 million European companies.

In addition to the most recent figures, the database also contains historical annual figures. The rating model, the third part of the solution, is a Zanders product. Zanders adjusted the model to the FACT software and optimized it in terms of statistics on the basis of AMADEUS data.

The initiators are confident that the total solution, comprising data, software, and model, is certainly more than the sum of its constituent parts. They have been working together on this intelligent solution for over 18 months; a solution that, in principle, companies can use to meet all of their needs in the area of credit risk. The tool is not only beneficial to corporates; banks that require ratings can also make use of it.

As Evert de Vries, a Zanders consultant closely involved in the project explains, “A large global energy supplier is already a customer, and we are currently holding talks with a range of interested parties.”

A practical explanation

In practical terms, the tool works as follows: EAGLE starts up in an ordinary browser, the data of, say, a large German company is then loaded. In the first instance, the tool specifies an Implied Financial Rating (IFR); that is, a provisional financial rating. This provisional financial rating is based solely on the financial data available in the system. Furthermore, this more or less automated rating can also be used as a ‘prospect filter’. The user can then add qualitative data.

The combination of qualitative and objective information will subsequently lead to an Obligor Risk Rating (ORR). The result is a clear and transparent view of the financial health and management of the company being investigated.

The ORR is given in the form of a letter code comparable to those issued by ratings agencies such as Fitch or Standard & Poor’s. AA is issued for companies that can easily meet their credit-related obligations while C is issued for organizations located at the other end of the spectrum. In total, there are 14 possible outcomes.

Although Ruud Korff de Gidts and Evert de Vries emphasize that “the tool is a good instrument for determining the credit risk associated with a given customer,” Korff de Gidts adds that “the final responsibility nevertheless rests with the company using the tool. It is ultimately the user of the model who must draw the right conclusions and make responsible credit-related decisions based on the outcomes. What this solution does is provide quantitative insight and substantiation for those decisions.”

The solution is made available on the basis of a license fee for use of the software, model, and database, and can quickly be made operational.

“It is also possible to adjust the standard model to specific requests and information requirements of a given company, and calibrate it to that company’s portfolio,” Lode Debackere adds.

“We can adjust the model to the particular sector or country in which a company is operating. We wish to make it as easy as possible for our customers.”

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Basel III     care     cash management     corporate finance     corporates     credit risk     financial institutions     financing     hedge accounting     modelling and valuation     processes and systems     public sector     risk management     SAP     strategy and organization     SWIFT     treasury     treasury management     valuation desk     WACC