Credit Risk of Commodity Companies

The purpose of this two-day workshop is to enhance credit skills and equip participants with tools and techniques to understand a commodity trader's commercial and financial viability and to appreciate the key credit, market and country risks which occur in commodity trade transactions. The workshop is highly interactive and will make use of case studies and exercise to demonstrate key learning points.

Key Learning Outcomes:

• Apply a structured approach to identify, quantify and evaluate credit, market and country risks in commodity trade transactions
• Distinguish the risks in different types of credit exposure
• Focus on the financial and ratio analysis in order to assess the performance and financial health of a commodity trader.
• Utilise qualitative, quantitative and market indicators which could be early warning signals of problems
• Recommend facility amounts and structures which are appropriate to the risk profile of the client and protect sufficiently the interests of the bank.

Analytic Framework

Introduce and reinforce a 4-step analytic framework for credit assessment of a commodity company: purpose, payback, risks and structure.

Purpose

• Identify user of the funds: pure trader, integrated trader, manufacturer, finance or holding company
• Identify which stage of the business cycle is being financed

Payback

• Main source of repayment: credit transactions: assets, refinance, cash flow and external support
• Focus on sources of payback for commodity producers and traders

Risks

• External environment: Macro economic and geo political
• Sector related: Energy, soft and hard commodities
• Company specific

Structure

• Debt profile, ranking, and safeguards
• Exercise: example of different purposes and payback sources

Risk Analysis: Business Risk

Review and assess the key business risks likely to impact a commodity trader

Business cycle challenges

• Company's operations using the business cycle model: sourcing, transporting and warehousing of goods
• Exercise: link between business cycle and accounting
• Balance sheet and income statement performance
• Exercise: Create expectations about balance sheet and profits
• Bargaining positions: understand dynamics of suppliers and buyers

Key drivers of earnings

• Key drivers of earnings: quality and stability of sales, profits and cash flow
• Quantify performance
• Apply and compare key ratio and cash flow performance measures

Risk Analysis: Financial Risk

Evaluate liquidity and determine an appropriate level of financial risk

Financial strategy

• Business risk used to gauge an appropriate level of financial risk
• Corporate treasury objectives: tenor matching, funding and liquidity needs
• Risk management and use of derivatives

Credit strength and impact on access to markets

• Financial flexibility and liquidity
• Uses and limitations of traditional working capital measures
• Payment readiness and ability to meet short term funding requirements
• Ratio and cash flow tools
• Exercise: evaluate liquidity of a trader

Solvency

• Define, measure and evaluate solvency for a trader
• Exercise: assess solvency of a trader and a processor
• Early warning signals of financial distress

Risk Analysis: Overview of Management and Shareholders

Review management and shareholder issues specific to commodity traders

Management

• Structured approach to analysis: strategy, systems, skills and structure of management specific to traders
• Exercise:Identify management risks

Shareholders

• Impact of organisational structure on credit risk
• Exercise: impact of group structure on credit risk
• Evaluate influence, control, and potential support.

Structuring Features

• Review how to determine exposure profile and set safeguards to protect lenders' interests

Debt profile

• Tenor and amount of exposure, drawdown limits
• Exercise: structure tenor and amount of lines

Ranking

• Different ways to achieve seniority / pari passu ranking; perfecting security interests.

Safeguards

• Collateralised versus clean transactions
• Setting lending margins / haircuts and thresholds, LTV, top up clauses
• Exercise: structuring features to mitigate risks

Pricing

• Risk and return considerations.

Case Study

All aspects of the analytic framework will be applied to a main illustration case study throughout the workshop. Participants will use the analytic tools to conclude on the credit worthiness of the company, benchmark performance to peers, identify the credit concerns and recommend an appropriate level and structure of exposure.