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Post-webinar Q&A: Global Credit Risk Trends 2021 and Beyond

Highlights

Find out the answers to your questions asked during the Credit Risk Trends 2021 and Beyond and watch the webinar replay here.

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  1. What is the best way to calculate country risk which you can use as an input to valuation models?
    At S&P Global Market Intelligence, we use Country risk scores (CRS) generated by S&P Global Ratings methodology in which we consider different factors such as Economic, Institutional, Financial system, and Payment culture/rule-of-law risks. These CRS are then used in various analytical models.
  2. How does the increasing level of reverse repos impact the overall market going forward?
    As reverse repos increase, banks will deposit their surplus money to Central banks. It will increase loan interest rates and reduce money in the circulation, thus decreasing inflation.
  3. When will climate change start to be incorporated into credit risk or to what extent it is currently?
    Climate change scenarios are already being incorporated into credit risk. As many countries introduce carbon tax by penalizing high omission CO2 emitting sectors, it is important to analyse long term effects of these additional carbon taxes on company financials. At S&P Global Market Intelligence, we have started to incorporate climate change effects in our new model Credit Analytics model - Climate Credit Analytics where you can evaluate the impact of various of climate related scenarios on credit risk and carry out counterparty and portfolio-level analysis for thousands of companies across multiple sectors
  4. Are private-rating tools likely to increase in importance post-COVID-19? Do you see big data as creating an opportunity for more companies to be rated comparatively?
    Yes. Ratings investigate different perspectives; these will be helpful to understand the creditworthiness of companies. For unrated entities, we already have wide variety of analytical models which were developed using various dimensions of data. At S&P Global Market Intelligence, we have CreditModel (for both Corporates and Financial Institutions) which aims to statistically match with standalone credit ratings provided by S&P Global Ratings.
  5. What is Risk Management?
    Risk management is the process of identification, analysis, and acceptance or mitigation of uncertainty in investment decisions. It is helpful to monitor business performance.
  6. How much of a K-shaped recovery do you expect post-Covid to be?
    A K-shaped recovery occurs when, following a recession, different parts of the economy recover at different rates, times, or magnitudes. The post-pandemic economic recovery is K-shaped, due to the differences in degree of recovery (time, degree, magnitudes) for different industries. This is likely as technology and large capital firms are expected to recover at a far faster rate than small businesses and industries directly affect by COVID-19, such as hospitality.
  7. Why are corporate yields lower in the more positive economic environment? Are you expecting risk spreads to narrow that much?
    In a more positive economic environment, we would expect the economy grows at a moderate pace, corporates have sufficient liquidity with improved cash flow, decreased probability of default and thus leads to improved credit quality. This will lead to lower yield spreads and eventually lower corporate yields. We would not expect yield spreads to narrow too much, given a still uncertain environment, with new COVID surges and changing economic environments and policies, the current recovery is observed at a moderate pace.
  8. Do you anticipate a cascading effect of the poor credit returns on the global banking system?
    During 2020, due to travel and lockdown restrictions, the impact was on major industries due to supply chain disruption. We are not expecting a cascading effect as during the 2008-09 crisis on banking system due to increase in vaccination, regular liquidity injections and controls such as lower repo rates by central banks in different countries reduce cascading effects into different industries.
  9. What will be the key drivers for SMEs to access more credit? and Which KPIs should be considered?
    There are multiple key drivers such as efficiency, liquidity, working capital management and ensuring cash flow generation. The KPIs includes growth rate, debt to equity ratio, profit margin and cash conversion cycle to name a few.
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