TOOL D1
This tool provides you with a checklist to identify and prioritise major business drivers that jointly determine a client’s level, stability, and certainty of cash flows. Of the many business risk factors – referred to as the “4 Cs and 3Ms” – identify the five or six most critical ones.
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• A business factor is considered a Risk if there is a high probability that the factor will have a material impact on disrupting a client’s cash flows.
• A business factor is considered a Natural Mitigant if it has the potential to protect a client’s cash flows from uncertainty and volatility.
• Risks will have to be monitored through internal triggers, and formal controls be sought through covenants. Natural Mitigants may also have to be recognized and captured in the deal structure (covenants) such that they are preserved throughout the term of the credit exposure.
1. Country Risk
| Factor | Risk? | Mitigant? | |
|---|---|---|---|
| 1. Political | • Stability • Fiscal Policy • Flow of Capital • Currency reserves • Monetary Policy • Government Debt • Moratorium risk • Trade policies • Privatisations • Nationalisations • Interference and/or support • FX controls • Corruption | Mitigant? | |
| 2. Social | • Demographics • Labour • Unions • Decision making • Trends • Cultural | ||
| 3. Legal | • Contract law • Maturity • Justice system | ||
| 4. Regulatory | • Stability • Maturity | ||
| 5. Environment | • Natural disasters • Pollution risk | ||
| 6. Physical Infrastructure | • Transportation network |
2. Macro economy
| Factor | Risk? | Mitigant? | |
|---|---|---|---|
| 1. Economic | • GDP growth • Size of economy • Economic cycle • Unemployment • Inflation/deflation • Interest rates • Terms of Trade • Currency | Mitigate? | |
| 2. Financial Markets | • Maturity • Liquidity |
3. Market (Industry)
| Factor | Risk? | Mitigant? | |
|---|---|---|---|
| 1. Product Demand/Price | Mitigate? | ||
| 2. Competitive Rivalry | • Market structure • Key players • Industry life cycle | ||
| 3. Barriers to Entry | • Cost to enter • Legislation/ regulation • Government protection/ interference | ||
| 4. Risk of Substitutes/ Technology Risk | • Viability/availability • Switching costs | ||
| 5. Supplier Bargaining Power | • Importance • Switching costs • Availability/quality • Forward integration | ||
| 6. Customer Bargaining power | • Importance • Number • Backward integration • Switching costs | ||
| 7. Distribution Channels Power |
4. Company Position
| Factor | Risk? | Mitigant? | |
|---|---|---|---|
| 1. Market Position | Mitigate? | ||
| 2. Size | |||
| 3. Diversification | |||
| 4. Innovation | • R&D | ||
| 5. Plant & Machinery | • Age, reliability • CAPEX needs • Discretionary vs mandatory CAPEX • Outsourcing | ||
| 6. Procurement | |||
| 7. Inventory | |||
| 8. Operating Efficiency | • Capacity utilization • Cost structure • Operating Leverage |
5. Management
| Factor | Risk? | Mitigant? | |
|---|---|---|---|
| 1. Individuals | • Experience • Qualifications • Team/depth • Stability • Succession • Track record | Mitigate? | |
| 2. Strategy, Planning, Execution | • Planning process • Decision making • Short-term/long-term • Realistic • Performance in adverse • Conditions • Acquisition success/failure | ||
| 3. Transparency | • Organizational complexity • Information policy • Communication with stakeholders • Disclosures | ||
| 4. Attitude | • Balance across stakeholders • Risk appetite • Financial policy • Integrity • Compensation | ||
| 5. Governance | • Board structure • Board independence • Board process • Involvement • Oversight • Audit committee • Incentives • Succession | ||
| 6. Event Risk | • Acquisitions, Mergers Share buy-backs |
6. Concentrations
| Factor | Risk? | Mitigant? | |
|---|---|---|---|
1. Concentration Risk | • Geographic • Macroeconomic • Industry • Management • Customers • Suppliers • Seasonality • Level of dependency between both parties | Mitigaee? |
7. Contingencies
| Factor | Risk? | Mitigant? | |
|---|---|---|---|
| 1. Country-related | • Reputation • Terrorism • Climate | Mitigate? | |
| 2. Industry-related | • Environmental • Health & Safety • Regulation • Litigation | ||
| 3. Company-related | • Warranties • Litigation | ||
| 4. Product-related | • Product liability |
