Credit Risk Analysis-Doing Business with Latin American Firms

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Credit managers of U.S.-based companies usually face more challenges when doing business with firms located overseas. However, while the tasks of the credit managers may be more difficult in these situations, the potential financial gains for their companies may be worth the extra effort. Emerging markets in some countries may offer a lucrative area of new business opportunities for American companies.

Latin America offers a robust business climate for some areas of business, such as in the mining, manufacturing and agricultural sectors, which have done well over the last few years. In agriculture, for example, Brazil is poised to become the leading producer of soybeans, eclipsing the top position currently hod by the United States.

Joe Granda, Vice President of Business Development at Credit and Management Systems, headquartered in Lake Bluff, IL, said that getting credit information and assessing credit risk in Latin American countries is a little different than for domestic and European firms. His company provides information and maintains credit scoring models used for analyzing companies located in Latin America as well as other countries.

"Getting the information may take you a little longer," Granda said. "You may have to wait a week. We build a credit scoring model based on the business itself. We take the information that might come from D&B, and other credit rating firms, and based on your risk appetite come up with a score." The credit score, he pointed out, offers a quantitative assessment on credit risk, a credit line recommendation and how to prioritize collection procedures. "We literally help the collector to form a queue on what firms to follow-up first."

The credit modeling technique Granda's firm and others like his use is a rules-based model where various judgments are made about the weight various financial and payment history variables should be assigned. However, he said his company's models, like those of other firms, could incorporate other statistical calculations used in behavior-based models. These models measure the statistical correlations between and among variables as they relate to the credit risk score of a company. "We can incorporate statistical models as part of it."

The risk a country presents is also incorporated in Granda's firms' credit scoring models, he noted. "In Latin America you would typically include country risk. There's not one scoring model that fits everyone. You may want different scoring models for each country." He noted that companies such as Standard & Poors, Moody's and Coface provide company risk assessments. Factors relating to the political environment and stability of a country and economic factors, such as the value of the local currency, are considered in models that score country risk, he pointed out.

Typically though, a company that has been in existence for a long time is usually a good credit risk, Granda said. This is because it has been able to financially endure the swings in political stability and economic conditions that occur over long periods in many Latin American countries. "A company that's been around 20 or 30 years has survived many fluctuations. It's survival of the fittest."

Financial statements, as in any credit risk analysis, should be evaluated as part of the credit-scoring process. Granda said that financial statements on most Latin American firms aren't as transparent; meaning that they don't provide the same level of detail as U.S. company financial statements. The reason for this is that most companies in Latin America don't raise money through stock issuances. Therefore, the financial statements required for equity transactions do not drive the composition of financial statements kept by many Latin American firms. "In Latin America there really isn't a strong equity environment. They rely on banks and long-term debt as opposed to equity markets." Latin American firms also rely heavily on business-to-business credit, Granda said. …