Global Corporate Rating Model
The EAGLE global corporate rating model generates credit ratings for millions of corporates worldwide. The model can be used by both large corporates and banks for determining the risks related to their counterparties. EAGLE is built on the web-based credit platform FACT provided by Bureau van Dijk. The model is based on Zanders’ in-depth credit ratings and credit risk management expertise. It is statistically optimized, based on the comprehensive and consistent financial databases ORBIS (worldwide coverage) and AMADEUS (European coverage) published by Bureau van Dijk.
For many years, relative to other risks faced by companies, credit risk has set low on the list of priorities. However, the financial crisis caused a paradigm shift, and not only in the banking sector. Increasingly, organizations are discovering that managing credit risk has a clear added value. After all, every entrepreneur doing business with multiple 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 of existing and potential debtors enables companies to address these risks in a consistent and focused manner, prevent a threat to their own financial strength, and manage related working capital needs consistently. Next to that, a financial assessment of suppliers provides insight in the supplier’s financial capabilities. This aspect is often under exposed, while it is highly relevant (next to the skills and technical capabilities) for the performance of the supplier.
“To quote an Indian philosopher: to bring big things to light one must pay attention to the essence of the smallest detail.”
Determining the creditworthiness of companies requires considerable knowledge, especially of risk models and appropriate software. Moreover, such assessment of creditworthiness requires access to a substantial amount of specific data. In close cooperation, Zanders and Bureau van Dijk have developed an advanced solution that integrates models, software and data into one application. Both corporates and banks will benefit from this integrated approach.
Rationales: credit rating models improve the efficiency, transparency and uniformity of the credit limit setting and provisioning processes, which in turn will improve the quality of the debtor portfolio. Specifically ratings will facilitate to manage the debtor book in a more consistent way regarding:
- Risk-adjusted credit approval authorities
- Facility limit setting for individual debtors
- Determination of the frequency of reviews
- Monitoring trends in the quality of the portfolio: for instance concentration risks
- Performance measurement
- Formulation of credit policies, e.g. risk appetite, collateral policies, etc
First order benefits of EAGLE:
- Faster and easier access to high quality client information
- Consistent assessment of risk on counterparties
- Easier and faster limit approval and limit setting
- Setting guidelines for collateral requirements
- Usage as a prospect filter
- More efficient credit process
Second order benefits:
- Consistency in risk determination and risk mitigation
- Improvement of working capital management
- Enhanced debtor portfolio management
- Reduction in bad debtor risk
- Lower losses due to non-payment
- Better alliance between sales and credit units
- Transparency for all departments involved
“This tool is also very suitable for assessing the interest rate on inter-company loans.”
About Bureau van Dijk
Bureau van Dijk is best known for its range of company information products that is co-published with many renowned information providers.
Bureau van Dijk’s product range includes databases of company information and business intelligence for individual countries, regions and the world. The global database, ORBIS, combines information from around 100 sources and covers over 80 million companies. Bureau van Dijk is always looking to enhance its coverage and sourcing new information providers that can enrich coverage or help Bureau van Dijk to increase its coverage of companies. Bureau van Dijk software helps users create sophisticated searches and analysis of the financial information while being easy to use.
Besides, Bureau van Dijk is offering software for specific business processes like FACT, the intelligence credit risk management solution. FACT is a flexible framework used by large financial institutions and corporations to manage their credit risk. Designed to handle the entire rating and limit approval process, it can be rapidly configured to match internal procedures. Users can add custom credit applications and financial analysis templates, set up workflow and approval processes, and implement archive procedures.
Large financial institutions use FACT to meet their Basel capital adequacy requirements for the advanced internal ratings-based approach.
The total solution consists of three essential elements:
- A technical platform: FACT
- An impressive database of company information: ORBIS or AMADEUS
- An advanced credit rating model: EAGLE (Expert Advanced Global Lending Engine)
The technical platform and database are well respected Bureau van Dijk products. Known as FACT, the platform is a comprehensive tool for credit risk management processes. Although one could opt for using FACT exclusively for EAGLE, FACT includes the following functionalities or parts thereof:
- Credit approval workflow
- Internal credit rating models (PD, EAD, LGD and pricing models)
- Archiving and reporting functionalities
- Portfolio Monitoring and Alerts
Embedding a rating model in a single ratings IT platform enables the user to maintain consistent usage and to archive data necessary for validation, audit, and review purposes. FACT can be linked to the Bureau van Dijk database AMADEUS, a database containing the financial information of over 15 million European companies distributed over 43 countries. On top of this, the Bureau van Dijk ORBIS worldwide database with over 80 million companies is available for EAGLE as well. Financials are spread in a consistent manner after several quality checks, which are essential requirements for assigning accurate and reliable ratings. In addition to recent figures, these databases also contain 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 ORBIS and AMADEUS financial data and historical default data. The EAGLE rating model is fully integrated in the FACT application, relying on the extensive databases published by Bureau van Dijk. The model generates a rating for companies with a turnover above EUR 10 million. Extension to companies with a turnover less than EUR 10 million is also possible.
The rating model is based on three building blocks:
- Financial Analysis which consists of several quantitative pillars, such as Operations and Liquidity with their respective default risk drivers
- Business Analysis which consists of management related variables
- Behavioral Analysis which takes external and internal signals into account
The quantitative variables of a company are compared with its industry-peer group. Therefore, industry specific scoring functions were developed for the values of all financial ratios. Within the model, 16 industries are distinguished. Based upon financial figures only, EAGLE is already capable of assigning an Implied Financial Rating to corporates across Europe in AMADEUS and corporates across the globe in ORBIS. This ‘automated’ Implied Financial Rating can, among others, be used as a filter for prospective clients. After the Business Analysis and the Behavioural Analysis, the initial Obligor Risk Rating results. Finally, EAGLE takes elements into account such as contingencies, country risk and parental support resulting in the final Obligor Risk Rating. The model generates a transparent Obligor Risk Rating Report that will show all building blocks, pillars and variables, as well as the assessment comparison with the counterparty’s peers. The model distinguishes 14 rating classes. The highest rating, AA, corresponds to the lowest probability of default, whereas a C rating is the lowest rating and corresponds to the highest probability of default. EAGLE’s rating scale is comparable to the rating scales of rating agencies, moreover, it is also directly linked to one-year probabilities of default, based on an extensive default database of Bureau van Dijk.
Next to the ratings, the model also contains a standard credit limit structure, which makes it possible to manage the debtor portfolio in a consistent way. Standard limits should be considered as a guideline.
Validation: the model ratings have been back-tested (by optimizing the model’s discriminatory power and calibrating ratings to probabilities of default) and benchmarked. Therefore, extensive statistical tests have been performed to optimize the model’s performance. Statistics showed consistent and very satisfactory results.
The model documentation includes a comprehensive description of the methodology, variables and definitions etc. Next to that, it includes validation results. Model documentation is transparent, complete and accurate and fulfills regulatory requirements (relevant for banks). Model documentation is available for certified users of EAGLE and they will receive an annual update of the performance and validation of the model.
EAGLE is designed to cover the majority of counterparties in the respective databases. Notwithstanding, for specific businesses and/or in view of users’ own views and policies, the model can always be customized to suit the client’s needs. Depending on the country and the business, users of EAGLE might want to express their own views and polices in the rating model. Upon request, the model can be customized to embed these specific elements. Amendments might cover, among others, a change in quantitative and qualitative variables (including definitions), the desired number of rating classes, different scoring functions, etc.
“This tool is also very suitable for assessing the interest rate on inter-company loans.”