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Risk Underwriting 04 04 2011 Olivier FOULONNEAU 2 Aman Union Agenda Country risk analysis Sectorial ratings Corporate risk evaluation 3 Aman Union Part 1 Country risk analysis 4 Aman Union Country @rating ● A measure of the average level of short-term non-payment risk associated with companies in 165 countries ● Threefold expertise developed by Coface Macroeconomic Expertise in business environment Microeconomic 5 Aman Union expertise in assessing country risk expertise Country @rating Business climate Coface experience Quality and availability of financial information Creditor protection, debt collection efficiency 6 Aman Union Institutional environment Economic, financial, and political prospects Companies’ payment behaviour Growth vulnerability Foreign exchange liquidity-crisis risk Sovereign financial vulnerability Banking sector’s fragilities External overindebtedness Political vulnerabilities Sources of information ● IMF, World Bank, regional financial institutions reports ● IMF, World Bank, OECD statistics ● Private institutions reports : Institute of International Finance, Economist Intelligence Unit ● International private banks reports ● Political, economic or financial studies written by experts ● World press (Financial Times, Wall Street Journal, Le Monde) ● Internet ● Credit insurance data (Coface, Berne Union) 7 Aman Union 7 levels scale ● A1 to A4 for the lowest risks A1 : The political and economic situation is very good. A quality business environment has a positive influence on corporate payment behaviour. Corporate default probability is very low on average A2 : The political and economic situation is good. A basically stable and efficient business environment nonetheless leaves room for improvement. Corporate default probability is low on average A3: Changes in generally good but somewhat volatile political and economic environment can affect corporate payment behaviour. A basically secure business environment can nonetheless give rise to occasional difficulties for companies. Corporate default probability is quite acceptable on average A4: A somewhat shaky political and economic outlook and a relatively volatile business environment can affect corporate payment behaviour. Corporate default probability is still acceptable on average 8 Aman Union 7 levels scale ● B, C and D for the highest risks B: Political and economic uncertainties and an occasionally difficult business environment can affect corporate payment behaviour. Corporate default probability is appreciable C: : A very uncertain political and economic outlook and a business environment with many troublesome weaknesses can have a significant impact on corporate payment behaviour. Corporate default probability is high D: A high-risk political and economic situation and an often very difficult business environment can have a very significant impact on corporate payment behaviour. Corporate default probability is very high 9 Aman Union COFACE EXPOSURE (base 100 : Tunisia 2001) 250 200 150 100 50 0 2001 2002 2003 2004 2005 Morocco 10 Aman Union 2006 Algeria 2007 Tunisia 2008 2009 2010 TUNISIA Population GDP 10 (million) 40 (US$ billion) Rating country Business climate rating A4 A4 Strengths Weaknesses Geographic position Weight of agriculture and public sector Natural resources Unemployment Integration into international organisations Social and geographical inequalities Skilled workforce Political uncertainties Need for improvement in business climate 11 AmandeUnion Titre la présentation power point Risk assessment Political uncertainty with many social and economic challenges Activity dependent on changes in the political situation Deterioration of twin deficits 12 Aman Union Ja n Ju -9 l 7 Ja y 97 n Ju -9 l 8 Ja y 98 n Ju -99 l Ja y 9 n 9 Ju -00 l Ja y 0 n 0 Ju -01 l Ja y 01 n Ju -0 l 2 Ja y 02 n Ju -0 l 3 Ja y 03 n Ju -0 4 ja l y 0 nv 4 ju -05 ly ja 05 n ju -06 ly ja 06 n Ju -07 ly ja 07 n Ju -0 ly 8 ja 08 n ju -0 l 9 ja y-0 nv 9 ju -1 ly 0 ja -10 n11 PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 13 Aman Union 300 WORLD 250 Tunisia 200 150 100 50 0 MOROCCO Population 32 (million) 92 (US$ billion) Rating country Business climate rating A4 Strengths A4 Weaknesses Natural resources Dependence on agriculture Geographic position Lack of productivity and competitiveness Diversification of production Poverty and unemployment Macroeconomic stability policy Vulnerability to possible terrorist attacks Political stability 14 GDP Aman Union Risk assessment Economy still dependent on the farm sector and the European Union Strengthened public finances and moderate foreign debt Political stability, but challenges on social issues 15 Aman Union Ja n Ju -9 l 7 Ja y 97 n Ju -9 l 8 Ja y 98 n Ju -99 l Ja y 9 n 9 Ju -00 l Ja y 0 n 0 Ju -01 l Ja y 01 n Ju -0 l 2 Ja y 02 n Ju -0 l 3 Ja y 03 n Ju -0 4 ja l y 0 nv 4 ju -05 ly ja 05 n ju -06 ly ja 06 n Ju -07 ly ja 07 n Ju -0 ly 8 ja 08 n ju -0 l 9 ja y-0 nv 9 ju -1 ly 0 ja -10 n11 PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300 16 Aman Union WORLD Morocco 250 200 150 100 50 0 ALGERIA Population GDP 35.5 (million) 160 (US$ billion) Rating country Business climate rating A4 B Weaknesses Strengths Oil and gas reserves Dependence on hydrocarbon Financial position Weight of public sector Focus on economic diversification Poor business environment Unemployment 17 Aman Union Risk assessment Strong growth driven by the hydrocarbon sector and public spending Moderate public debt and solid external financial position Challenges on social issues and business climate 18 Aman Union Ja n Ju -9 ly 7 Ja 97 n Ju -9 l 8 Ja y 9 n 8 Ju -9 l 9 Ja y 9 n 9 Ju -0 l 0 Ja y 0 n 0 Ju -0 ly 1 Ja 01 n Ju -0 l 2 Ja y 0 n 2 Ju -0 l 3 Ja y 0 n 3 Ju -0 4 ja ly 0 nv 4 ju -05 ly ja 05 n ju -06 ly ja 06 n Ju -0 ly 7 ja 07 n Ju -0 ly 8 ja 08 n ju -0 l 9 ja y-0 nv 9 ju -10 ly ja -10 n11 PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300 19 Aman Union WORLD North Africa 250 200 150 100 50 0 Contagion in North Africa and the Middle East Common political, economic and social factors Aspirations Increases for greater political representativeness in food and energy prices Importance of the population under 25, with difficult access to qualified employment Privileges granted to one specific category of citizens Developement of the middle class through strong demographic and cultural evolutions Low investment level caused by nepotism, cronyism and corruption Unequal 20 Aman Union distribution of the benefits of economic growth Decline in GDP growth 7,0 6,0 5,0 4,0 2010 e 3,0 2011 f 2,0 1,0 21 AmandeUnion Titre la présentation power point en Ye m ni si a Tu Sy ria oc co M or by a Li da n Jo r yp t Eg Al g er ia 0,0 Youth Unemployment 35 30 25 20 15 10 5 0 Algeria Morocco Unemployment rate (official) 22 AmandeUnion Titre la présentation power point Tunisia Egypt Unemployment of pop. 15-30 (estimates) Investment-to-GDP ratio (%, 2009) 50 45 40 35 30 25 20 15 10 5 0 Algeria 23 Morocco Tunisia AmandeUnion Titre la présentation power point Egypt Brazil Russia India China No overreaction ● country ratings reviewed end of March through usual quaterly process but ● exposure frozen / reduced / cancelled on some buyers or countries 24 Aman Union Country rating Business climate Algeria A4 B Egypt B B Morocco A4 A4 A4 A4 Tunisia 25 Aman Union 26 Aman Union Country rating Business climate Bahrain A4 A3 Iran D D Iraq D D Jordan B A4 Kuwait A2 A3 Lebanon C B Libya D D Oman A3 A4 Qatar A2 A3 Saudi Arabia A4 B Syria C C UAE A3 A3 Yemen D D Busines s climate Country @rating Jan ‘07 Jan ‘08 Jan ‘09 Jan ‘10 Mar ‘10 Jun ‘10 Sep ‘10 Jan 11 2010 A4 A4 A4 A4 A4 A4 A4 A4 B Morocco A4 A4 A4 A4 A4 A4 A4 A4 A4 Tunisia A4 A4 A4 A4 A4 A4 A4 A4 A4 B B B B B B B B B Algeria Egypt 27 Aman Union Country @rating 28 Business climate Jan ‘07 Jan ‘08 Jan ‘09 Jan ‘10 Mar ‘10 Jun ‘10 Sep ‘10 Jan 11 2010 Kuwait A2 A2 A2 A2 A2 A2 A2 A2 A3 Qatar A2 A2 A2 A2 A2 A2 A2 A2 A3 Bahrain A3 A3 A3 A3 A3 A3 A3 A3 A3 UAE A2 A2 A2 A3 A3 A3 A3 A3 A3 Oman A3 A3 A3 A3 A3 A3 A3 A3 A4 Saudi Arabia A4 A4 A4 A4 A4 A4 A4 A4 B Jordan B B B B B B B B A4 Lebanon C C C C C C C C D Libya C C C C C C C C B Syria C C C C C C C C C Iran B D D D D D D D C Iraq D D D D D D D D D Yemen C C C D D D D D D Aman Union Part 2 Sectorial ratings 29 Aman Union Sectorial ratings ● A measure of risks on 16 sectors: – Agrifood - Pharmaceuticals – Chemicals - Mass retail – Steel – Paper - Electronic component - Telecommunications Mobile and network equipment - Computer industry - Mechanical engineering - Building & Civil engineering – Clothing – Textile Automobile Telecommunications ● Twice a year review of current evolution, strategies and prospects. Special attention to shocks and changes that can affect these sectors such as price, demand or technology evolutions. ● Rating on world level but also for 8 geographical areas: North America, Japan, Western Europe, Emerging Europe, Emerging Asia, Latin America, Middle-East North Africa and CIS. 30 Aman Union Sectorial ratings ● Does not assess financial yields or stock market outlooks. ● Three types of measurements: vulnerability of economic conditions in the sector, which reflects the influence of market prospects, price levels, and production costs on company solvency company financial solidity in the sector, which reflects the capability of companies to cope with economic downturns payment experience on transactions payable in the short-term as reflected by Coface 31 Aman Union 10 levels scale 32 A+ A A- The economic environment has been good in the sector and has had a positive influence on the company financial situation. Payment experience has been satisfactory. Default probability has been low on average B+ B B- In an essentially favourable economic environment nonetheless not safe from short-term deterioration with negative repercussions on the company financial situation, payment behaviour is generally correct and default probability acceptable C+ C C- In a very uncertain sectoral environment combined with a very vulnerable company financial situation, payment behaviour is relatively poor with default probability disquietingly high. D In an unfavourable sectoral environment, a deteriorated company financial situation which is at the root of generally poor payment behaviour. Default probability is high. Aman Union World North Am Japan W Euro Emerg E Emerg A Latin Am MENA CIS Agrofood A- A B A B B A Car industry C- D B+ C B- B B- B+ C+ Chemicals B+ B+ A- B+ B A- B+ A B Clothing C C- C- C B B+ C+ B Computer B- B- B- B- B+ B B+ B Construction C+ C B- C+ B+ B+ B+ A- B+ Electronic B B+ B+ B Distribution B+ B A- B+ B+ A- A- A A Engineering B- B- B+ B- B- B+ Pharma A- A- B+ A- B (dist) A A- (dist) B (dist) B (dist) Steel B+ B+ A- B+ B B A- A B Telecom equip B B B+ B Telecom ope A A- A+ A A A A A+ A Textile C C- B- C- B- A- B- B B- Tourism C+ C C B- B- B B- B+ C+ 33 Aman Union B B+ Part 3 Corporate risk evaluation 34 Aman Union ● Buyer Non financial data Legal Forms Identification data Environment & Behaviour Miscellaneous ● Buyer Financial data ● Securities 35 Aman Union Limited liability ● Separate entity distinct from the personal identities of its individual members. ● Liability limited to the total assets of the business which exclude the possessions of any individual unless they have given personal guarantees. ● In the event of failure directors can however be disqualified from acting as directors for a number of years. 36 Aman Union Limited liability ● Advantages 37 Separate legal entity and ownership is transferable. Possible tax advantage. Specialised management. May be easier to raise capital. Business has to be registered according to the law of the country and is closely regulated. Financial information usually has to be filed for public record. Aman Union ● Disadvantages Limited liability: if a company has more liabilities than assets the creditors will not be able to get further money from the owners. Possible conflict between shareholders and management. More expensive to run. Co-operatives ● Advantages Set up to meet mutual needs and profit is shared with the members. Belongs to its members and is run democratically (one member one vote). ● Disadvantages 38 Aman Union Limited liability. Possible development of conflict between members. Longer decision making process. Requires members to participate for success. Less incentive to invest additional capital. Government-funded bodies I. DIFFERENT TYPES OF PUBLIC BODIES Usually public bodies include 1) a government department 2) 3) 4) 39 Aman Union Responsible for ensuring effective governance in its proper area , a government department carries out its function depending on its activity within the central government. For example : the department of health, environment, education, culture,…. nationalised industries such as automobiles industry, transport administration,… public corporations such as broadcast corporation. municipal councils and regions local and regional authorities Government-funded bodies II. CONSTITUTION OF PUBLIC BODIES 40 Aman Union Public bodies are established for the specific purpose of meeting needs of general interest. The company performs a public service subject to government or regions regulations. The authorised capital of a public company usually belongs – at least for 51 % – to public shareholders (such as the state, regional or local authorities, bodies governed by public law), A public company has legal personality and sometimes specific status but its management doesn’t differ from commercial company. Petition for bankruptcy against public bodies cannot be issued by ordinary proceedings Unlimited Liability ● Sole proprietorships Simplest business organisation. Owner fully liable for all debts to the extent of his personal assets. ● Partnerships 41 Essentially the same except that responsibilities and liabilities extend to the business assets and personal estates of all partners. Aman Union Sole proprietorships ● Advantages Unlimited liability to creditors. Complete control over business decisions. Limited regulation. Relatively low start up costs. No share of profits. ● Disadvantages 42 Aman Union Difficult to run the business effectively when the business grows substantially. Mismanagement possible in the event of absence, illness or death of owner. Lack of transparency: Not requested to disclose financial information publicly. Difficult to raise additional funds. Partnership ● Advantages Unlimited liability to creditors. More flexible and therefore more competent management. Easier to source additional capital. Limited regulation. Relatively low start up costs. ● Disadvantages 43 Aman Union Lack of control where responsibilities for business areas have not been clearly established. May be more difficult to raise capital when the business grows. Private individuals are not legally required to maintain any sort of accounting system. Hard to find suitable partners and possible development of conflict between partners. Identification data ● Date established: Records show that new businesses (less than three years of age) are more prone to insolvency, the first year being the most critical. ● Location: Some areas may be notorious for fraud. ● Number of staff 44 Aman Union Buyer environment & behaviour ● Group affiliation: Parent/subsidiary relationship Common owner/common director relationship. ● Directors background: String of failed businesses? Prestigious background? Age? Experience? ● Trading experience: To be relied on only if it has been obtained independently. History of disputes or late payments? ● Court actions and legal proceedings. 45 Aman Union Non financial data: Miscellaneous ● Secured Charges Created when money is borrowed against security. Registration compulsory to show unsecured creditors that in the event of insolvency other creditors would have priority over the assets of the company. Charge Borrowings secured over any type of assets including machinery and book debts. Debenture Borrowings secured over all the assets of a company. Mortgage Charge over properties, land … ● Exceptional events 46 Recent fire Burglary Aman Union Financial data: basic principles ● The ACCOUNTS show the financial position at the end of the year and summarise the transactions recorded in the books during that period. 47 The PROFIT & LOSS account shows the sales and expenses for that period. The difference between the two represents the profit -or the lossmade by the business. The BALANCE SHEET shows the state of the business at the end of that period. The CASH FLOW STATEMENT shows the cash generated by the business, the way it has been spent and the amount of cash left at the end of the year. Aman Union Financial data: fundamental accounting concepts ● Consistency Concept Items are to be treated consistently from one year to the next to ensure that meaningful comparisons can be made. ● Accruals Concept / Matching Principle Income and costs are always matched to each other. ● Prudence Concept Losses are recognised at the earliest opportunity. ● Going Concern Concept 48 The business will continue to trade for the foreseeable future. Aman Union Directors report ● Principal activities Description of the company’s activities. ● Business review Development of the business during the year and position (profit/loss) at the end of the year. Review of the subsidiaries for big groups. ● Future developments What the directors expect to achieve in the future. ● Research and development 49 Future research undertaken. Aman Union Auditors report ● Basis of Opinion Accounting policies chosen. ● Opinion Statement that the accounts give a true and fair view of the state of the company at the end of the financial year. ● Name and Address of the auditors. 50 Date at which the audit was completed. Signature. Aman Union Qualified auditors reports ● Disagreement about accounting treatment If the directors have followed an incorrect accounting policy. ● Limitation on scope of audit Can be due to fire or computer breakdown during the year, auditors not present at stock take … ● Fundamental uncertainty About the continued ability of the company to carry on trading, the funding of the business… ● Adverse opinion 51 When the accounts do not give a true and fair view. Aman Union Types of accounts ● Full accounts Auditors report Profit & Loss Balance Sheet Cashflow Statement Notes to the accounts ● Abbreviated accounts 52 Smaller companies do not need to file a Profit & Loss account or Cashflow statement. Aman Union Profit & Loss Account ● Turnover Total sales made by a company net of VAT. ● Cost of Sales All direct costs such as materials, staff and production overheads. ● Gross Profit Turnover less Cost of Sales. ● Operating Expenses Distribution costs and Administrative expenses. ● Operating Profit 53 Gross Profit less Operating Expenses. Aman Union P&L (2) ● Exceptional items Discontinued operations, restructuring costs … ● Profit on ordinary activity before interest and tax ● Interest receivable and payable ● Profit before tax ● Tax ● Net Profit 54 Aman Union Balance Sheet ● Fixed Assets ● Current Assets ● Current Liabilities ● Working Capital ● Long Term Liabilities ● Shareholders Funds 55 Aman Union Fixed assets ● Tangible assets Building, land, plant and machinery … ● Intangible assets Licences, trademarks, goodwill, investments … ● Depreciation is charged on all assets according to their expected useful life. 56 Aman Union Current assets ● Stocks Raw materials, stationery, cleaning materials … Work in progress Finished goods ● Debtors Trade debtors: Money owed by customers to the business. Amounts owed by group companies Prepayments Investments and cash in bank. 57 Aman Union Current liabilities ● Trade creditors Amounts owed to suppliers (our policyholders) ● Amounts owed to group/parent companies ● Bank overdraft/loan (current) ● Accruals Item that has not been invoiced but where it is known that a liability has incurred. ● Differed income 58 Income received before the balance sheet date but relating to a subsequent period. Aman Union Working capital ● Working Capital Current Assets less Current liabilities ● Need for Working Capital 59 Stocks + Trade Debtors less Trade Creditors. Aman Union Long-term borrowings ● Long term borrowings 60 Bank loans Hire purchase and lease agreements Mortgage Directors/Shareholders loans Inter company loans Aman Union Shareholders funds ● Share Capital Ordinary shares, preference shares and deferred shares ● Non distributable reserves Share premium account Revaluation reserves ● Distributable reserves 61 Accumulated profit and loss Aman Union Securities ● GUARANTEES Used when the debtor’s ability to repay his debts is in doubt. Parent Company Guarantee A parent company guarantee confirms that in the event of a subsidiary defaulting on payment, the holders of the guarantee would be able to institute legal proceedings directly against the parent company to obtain payment. Bank Guarantee Document supplied by an approved bank and certifying that a buyer has sufficient funds on deposit at the bank to pay a debt. Written obligation of a bank to repay the beneficiary of the guarantee the sum specified in the agreement on the agreed terms. 62 Aman Union Securities (2) ● RETENTION OF TITLE 63 Clause included in the conditions of sales and stating that the goods supplied remain the seller’s property until paid for. If the seller is not paid and the company is wound up, the seller will have priority over all other creditors of the company in respect of the goods or any property representing the goods. This clause does not constitute a charge on the goods. Aman Union Titre ● Sustisit la autet, vulla consenit nulluptat wisse vullutpat, veliquam, vullaore magna conse molore magna feuis er sustionsed dipisi. Texte de niveau deux Sustisit la autet, vulla consenit nulluptat wisse vullutpat, veliquam, vullaore magna conse molore magna feuis er sustionsed dipisi. Sustisit la autet, vulla consenit nulluptat. molore magna feuis er sustionsed dipisi cum. ● odolorem vel dolor sequissisl iustrud tiscili.Sustisit la autet, vulla consenit nulluptat wisse vullutpat, 64 Aman Union Titre ● Sustisit la autet, vulla consenit nulluptat wisse vullutpat, veliquam, vullaore magna conse molore magna feuis er sustionsed dipisi. Texte de niveau deux Sustisit la autet, vulla consenit nulluptat wisse vullutpat, veliquam, vullaore magna conse molore magna feuis er sustionsed dipisi. Sustisit la autet, vulla consenit nulluptat. molore magna feuis er sustionsed dipisi cum. ● odolorem vel dolor sequissisl iustrud tiscili.Sustisit la autet, vulla consenit nulluptat wisse vullutpat, 65 Aman Union Titre ● Sustisit la autet, vulla consenit nulluptat wisse vullutpat, veliquam, vullaore magna conse molore magna feuis er sustionsed dipisi. Texte de niveau deux Sustisit la autet, vulla consenit nulluptat wisse vullutpat, veliquam, vullaore magna conse molore magna feuis er sustionsed dipisi. Sustisit la autet, vulla consenit nulluptat. molore magna feuis er sustionsed dipisi cum. ● odolorem vel dolor sequissisl iustrud tiscili.Sustisit la autet, vulla consenit nulluptat wisse vullutpat, 66 Aman Union Titre ● Sustisit la autet, vulla consenit nulluptat wisse vullutpat, veliquam, vullaore magna conse molore magna feuis er sustionsed dipisi. Texte de niveau deux Sustisit la autet, vulla consenit nulluptat wisse vullutpat, veliquam, vullaore magna conse molore magna feuis er sustionsed dipisi. Sustisit la autet, vulla consenit nulluptat. molore magna feuis er sustionsed dipisi cum. ● odolorem vel dolor sequissisl iustrud tiscili.Sustisit la autet, vulla consenit nulluptat wisse vullutpat, 67 Aman Union Titre ● Sustisit la autet, vulla consenit nulluptat wisse vullutpat, veliquam, vullaore magna conse molore magna feuis er sustionsed dipisi. Texte de niveau deux Sustisit la autet, vulla consenit nulluptat wisse vullutpat, veliquam, vullaore magna conse molore magna feuis er sustionsed dipisi. Sustisit la autet, vulla consenit nulluptat. molore magna feuis er sustionsed dipisi cum. ● odolorem vel dolor sequissisl iustrud tiscili.Sustisit la autet, vulla consenit nulluptat wisse vullutpat, 68 Aman Union Titre Lorem ipsum dolor 2006 2005 5% Aliquam vera estat 2000 1800 1600 1400 1200 30% 1000 800 51% 600 400 25% 200 0 2007 69 Aman Union 2008 2004 2005 2006 2007 2008 Titre ● Sustisit la autet, vulla consenit nulluptat wisse vullutpat, veliquam, vullaore magna conse molore magna feuis er sustionsed dipisi. Texte de niveau deux Sustisit la autet, vulla consenit nulluptat wisse vullutpat, veliquam, vullaore magna conse molore magna feuis er sustionsed dipisi. Sustisit la autet, vulla consenit nulluptat. molore magna feuis er sustionsed dipisi cum. ● odolorem vel dolor sequissisl iustrud tiscili.Sustisit la autet, vulla consenit nulluptat wisse vullutpat, 70 Aman Union Les références RVB 88 88 90 71 Aman Union 193 0 55 0 56 106 249 194 136 238 127 0 75 105 141 177 178 180