Credit Proposition: An Illustrative Risk Profile

Presume, you are financing a company for erecting a factory to manufacture petro products ...

Its risk profile—right from its conception till repayment of debt—could run on the following lines:

Development:

·         Bid Risk :

Bidder does not turn up for execution of project

Bidder turns out to be non-competent

Time lost

·         Resource Risk:

Dull Primary Market

Promoters fail to mobilize equity

Delayed disbursement of loan

·         Cost Estimation Risk:

All costs not factored for

Estimates faulty

Half the way, project execution held up

Running around financial institutions

·         Credit Risk:

Counter party Risk

Multiplier effect of the foregoing

                           

Construction:

·         Completion Risk:

Suppliers,

Capital Markets,

Lenders and

Contractors contribution

·         Technology Risk:

       Obsolete

       Pilot basis

       Too complicated for assimilation

Operation:

·         Market/Off take Risk:

      New competitors have already entered

      Availability of cheaper alternatives

       Poor distribution network

·         Liability Risk:

Natural calamities

Civil riots and commotion

Political disturbances

·         Operating Risk:

Environmental considerations

Inefficient fuel source

Energy bottlenecks

·         Input Risk:
Depletion of natural sources
Changed pricing
Adverse political developments
Too much dependence on overseas markets

Non-commercial:

·         Political Risk:

       Political uncertainty
       Changed capital market perceptions
       Adverse currency movements
       Flight of foreign capital

·         Environmental Risk:

        Liberalization
        Global competition
        Cheaper imports

·         Force Majeur Risk:

Legal hassles
Protracted legal battles

Economic Environment:

·         Interest Rate and Currency Risk:

Weak Capital Markets
Shallow Money Market
Deregulation

·         Inflation Risk:

Interest Rate movements

Currency movements

Increased productions costs

·         International Price Movement Risk:

Less competitive
Sliding sales
Poor margins

      Contagion Effect

Risk Distribution Pattern:

Risk	Contractor	Lender	Supplier	Consumer	Financial Advisor	Gover-nment	Insurance
Bid	*				*
Rsource
Cost		*			*
Credit		*
Completion	*		*
Techno-logy	*
Offtake			*
Liability						*	*
Opera-tion
Input			*
Political
Environ-mental	*					*
Interest and currency
Inflation
Interna-tional Price Move-ments

*  These  risks are usually transferred to other agencies associated with project execution through    guarantees/ contracts/covenants etc. The rest remain with the promoters.