From the July-August 2009 issue of Treasury & Risk magazine

Developing a 360-Degree View of Credit Risk

Companies are expanding the use of all tools at their disposal as they seek to gain greater visibility into all exposures, develop creative strategies and take mitigating action quickly.

Microsoft got its credit risk management stress test when Circuit City approached insolvency just as the 2008 holiday season arrived. "We had to have our hardware and software on retailers' shelves for the holidays," says treasurer George Zinn. "The business expected it. But we could see Circuit City's credit quality vanishing. So we chose to sell our hardware on consignment. It was there on the shelves for shoppers right up until Circuit City closed its doors. Then we sent in our trucks to pick up our hardware. It was the ultimate compliment to our collections team that we didn't even make the creditors' committee."

The deep global recession is making the job of managing credit risk more difficult and more critical. Treasury and credit pros, suddenly in the spotlight, are buying more intelligence, running the credit and collections machinery in high gear and gingerly exploring what's left of the credit derivatives market. After years of relative obscurity, credit performance is now discussed at almost every board meeting, says Phil Gootee, president of Global Credit Services, a credit risk management firm in New York City.

Of course, treasury staffs would like to transfer credit risk to someone else. Some now wish they had bought credit insurance, the traditional risk transfer tool, a couple of years ago. Applications for credit insurance are up 60% at Coface North America, reports Michael Ferrante, president and CEO of this major underwriter based in East Windsor, N.J. But the premiums Coface takes in are up only 10% to 12%, even with double-digit price increases, Ferrante says, because underwriting is much tighter. "We're underwriting more conservatively. We almost always turn down certain accounts in the portfolios we insure. In today's market, it's hard to tell where the next problem will surface." Coverage is no longer available on auto companies or auto suppliers, and credit insurers are now taking a close look at the suppliers to the suppliers of automakers, he reports.

For Paris-based Euler Hermes, another big credit insurance underwriter, 2008 brought a 41% increase in applications for insurance over 2007. But business grew only 24% as underwriting tightened. "In our 115-year history, 2008 was the greatest year for new business development," says executive vice president Joe Ketzner. The company's U.S. operations are located in Owings Mills, Md.

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