Optimizing Credit Portfolio Surveillance: A Case Study

Over the last five years, S&P Global Ratings Long-Term Foreign Currency Issuer Credit Rating of a leading consumer electronics company deteriorated substantially, going from “A” (strong capacity to meet its financial commitments) in 2010 to “CCC+” (vulnerable) in 2015. Such dramatic changes in credit quality over a five-year period are more an exception than the norm¹That said, factors such as technological innovation, changes in commodity prices, geopolitical risks and sovereign debt defaults can lead to rapid and unanticipated changes in a company’s ability to service its debt payments.

If large, well reputed companies are not immune to financial distress, how can we detect potential favorable or adverse changes in credit quality early on? Focusing on a leading consumer electronics company, this case study shows how to take steps to monitor and potentially prepare for unwanted surprises.

^{[1]The Transitions Matrices Report from S&P Global Market Intelligence’s CreditPro database (as of June 2016) shows that the historical average probability of an “A-” rated entity becoming a “CCC-“ and below over five years was only 0.75% for static pools created between 1981 to 2011.}