A Decision Model Proposal for Credit Risk Rating of Companies

1. A Decision Model Proposal for Credit Risk Rating of Companies Gökhan GENCER

2. Introduction • Loans are a key element in economy • Loans are risky • Analyzing risk is essential • To analyze the risk a method is required • Methods are controversial

3. Scope • Non-bank & Non-financial firms • Small to Medium Enterprises & Corporate Enterprises • Probability of Default as defined on BASEL II Accord • Probability of default • Exposure at default • Loss given default • Importance weight of each criterion

4. Original Criteria Derived From the Literature • Return on Assets • Return on Equity • Net Profit Margin • Deadline of Receivable • Deadline of Payables • Assets Turnover • Acid Liquidity • Market Share • Firm Size • Cash Liquidity • Current Liabilities to Working Capital • Solvency Ratio • Leverage Ratio • Financial Expenses Coverage • Efficiency • Cash Conversion Cycle

5. Original Criteria Derived From the Literature • Macro-Strategic Capability • Decision Making Ability • Organizational Capability • Level of Standardization • Corporate Brand Recognition • Coordination Capacity • Relationship with Government • Relationship with Financial Sector • Tangible Collateral • Growth Opportunities

6. Experts

7. Experts’ advised the following to be added: • Buyer/Seller Concentration • Quality of Other Creditors • Gearing Ratio • Liabilities to Sales Ratio • Current Ratio • Competitive Analysis • Foreign Currency Risk • Market Diversification • Age of the Company • Track Record • Successor Risk • Sector’s Properties • Sector Diversification • Sector’s Position and Direction

8. Decision Makers’ Advices About Criteria • Decision makers advised to add • Quality of auditing • Priority in the business group • as a factor of Corporate Governance. • The Decision Makers’ advised following to be removed: • Assets Turnover • Growth Opportunities • Solvency Ratio

9. Decision Makers’ Advices About Criteria • The Decision Makers’ advised to divide • Relationship with Government • into • Reputational Risk and Morality • Country Based Risk • Decision makers advised to change • Relationship with Financial Sector as • Quality of Other Creditors • Cash Conversion Cycle as • Stock Cycling Rate

10. Hierarchic Model

11. Survey

12. Pairwise Comparison Judgements

13. Priorities of Criteria

14. Suggestions • This model can be used in a greater project that contains: • Exposure at Default • Loss Given Default • The results of this model can be used by companies,especially by SMEs. • These results can be used in a credit risk rating process for both the rating organizations and the banks. • The resulting values are a crucial input for the potential academic research