Credit Risk Evaluation

A systematic approach to Credit Assessment specially in banks : The "7 C’s of Credit "are key factors that lenders and credit analysts use to evaluate a borrower’s creditworthiness. Here's a concise overview of each: 1. Character Refers to the borrower’s reputation, integrity, and track record for repaying debts. Assessed through: -Credit history like eCIB reports - References - Background checks from suppliers/buyers/competitors/existing banking relationships 2. Capacity The borrower’s ability to repay the loan from earnings or cash flow. Assessed through: - Financial Statements - Personal Networth Statement - Debt service coverage ratio (DSCR) / Current ratio - Existing obligations - Debt Burden calculations 3. Capital The borrower’s own investment or equity in the business or project. - Shows commitment and reduces lender risk. 4. Collateral Assets/collateral offered to secure the loan and mitigate lender’s risk in case of default. Includes: - Property -inventory - Equipment - corporate guarantees 5. Conditions External and internal factors that affect repayment, like: - Industry health - Economic trends - Regulatory environment - Purpose and terms of the loan 6. Cash Flow Refers to the borrower’s actual inflow and outflow of cash and its adequacy to service the debt. - Crucial for determining repayment capacity. 7. Commitment Indicates the borrower’s willingness to contribute or take risk(e.g., personal guarantees, equity contribution). Demonstrates seriousness about the business and project.

Considerations for the High Yield Bond Market: The BB-rated High Yield (HY) bond market has shown strong performance, with favorable news recently related to growth and inflation.  Fundamentally, the companies represented in the HY Index have a favorable upgrade-to-downgrade ratio. BB-rated bonds constitute 50% of the HY market, distinguishing them from lower-rated B and CCC companies. BB HY bonds typically feature fixed rate, comparatively lower coupons, resulting in lower liability costs and more manageable debt service. In Contrast, the CCC-rated segment shows a concerning trend, with an upgrade-to-downgrade ratio below 0.5 (2x as many downgrades). The credit quality dispersion, shown in the chart below, reveals that BB vs. CCC-rated bonds trade at a spread margin of ~400 to ~1,200 bps, currently sitting inside of 750 bps.  While CCC credits can generate substantial returns during robust economic growth in a low default rate environment, and have rallied with the market in recent days, CCC deterioration is most pronounced during distress and recession. During the first half of 2020, the BB-CCC spread differential reached 1,200 bps, and in 2016, CCC spreads were even wider. It is noteworthy that Europe is straddling recession, and the BB-CCC European HY bond spreads have recently widened to 1,400 bps, surpassing its peak in 2020. So despite, the recent rally in lower-rated HY bonds, caution is warranted for the weakest segment of corporate credit. The HY bonds historical default rate: BB’s 0.4% default rate, B’s 1.4% default, and CCC’s a stunning 14.3% historical default rate! During a recession, default rates tend to increase significantly from historical measures. Composition of HY Index: 50% BB, 39% B, 11% CCC. 1 year ago, the HY Bond Index had 1.2% default rate. Today, the trailing 12M default for the HY bond market is 2.6%. By Q2 2024, I expect the default rate for high yield bonds exceed 4%. Michael Schlembach, Marathon Asset Management’s PM for High Yield, expects default rates to increase in 2024, with peak default rates potentially reaching ~1.0%, ~3.0%, and >20%+ for BB, B, and CCC’s, respectively. The key will be to invest in the debt of companies with solid fundamentals and financial strength to navigate the pending downturn. If you believe as I do that an economic slowdown (potential recession) is likely in 2024, it might be best to focus on higher quality credits with robust operating businesses within the HY market. Ford serves as a prime example in the BB sector, having recently been upgraded to Investment Grade by S&P, marking it as the largest 'rising star'. Ford represents 2% of the HY index with $41 billion of bonds, its upgrade has spurred demand for other quality BB-rated bonds to replace it. While recent inflows have tightened BB spreads, I advise against trading based solely on the technicals, as this post is intended purely for informational purposes. U.S. HY rated BB vs. CCC Differential:

“But why don’t you recommend these high-return bonds? They’re still bonds — and safer than equity, right?” This is a question we often get from clients. And each time, we explain — not all bonds are safe. We’ve always been cautious about such products, no matter how attractive the yield sounds. If you want to invest, first know the underlying risk. But often, we’re questioned back — “Aren’t bonds supposed to be safer? Then why not go for higher returns?” And here’s exactly why 👇 Take the recent TruCap Finance case. Thousands of investors poured in crores into their bonds, tempted by 13% returns, and confident it was “safe debt.” But on 16th July 2025, TruCap defaulted : both on interest and principal. Now, those same investors are facing capital erosion and no clear resolution in sight. This isn’t about hindsight. Also, the bigger issue : lack of liquidity. Even if you sensed trouble, you couldn’t exit. What this teaches us (again): -High yield = High risk -Credit risk is real -Liquidity risk is often ignored but is most damaging If you’re chasing high yields, do it through mutual funds — where there’s diversification, professional management, and at least some liquidity. Because in debt, the biggest risk isn’t volatility — it’s being stuck. #TruCapDefault #BondRisk #FixedIncome #ClientEducation #InvestmentAdvice #CreditRisk #HighYieldBonds #InvestorAwareness #PurvaInvestments #FinancialPlanning #DebtFunds #MFDViewpoint #RealTalk

Is your supplier capable of withstanding market unpredictability? In today’s volatile environment, a stable supplier is crucial to ensure seamless operations. From economic shifts to changing regulations, a supplier’s ability to adapt and stay resilient affects your entire supply chain. Here’s how you can assess a supplier’s stability and avoid disruptions. 𝐄𝐯𝐚𝐥𝐮𝐚𝐭𝐞 𝐅𝐢𝐧𝐚𝐧𝐜𝐢𝐚𝐥 𝐇𝐞𝐚𝐥𝐭𝐡 Reviewing a supplier’s financial stability helps you understand if they can manage cash flow and withstand market shifts. Request financial reports, such as balance sheets and profit statements, and look for signs of financial resilience. A financially stable supplier is better equipped to handle delays, material shortages, or production issues. 𝐂𝐡𝐞𝐜𝐤 𝐟𝐨𝐫 𝐋𝐨𝐧𝐠-𝐓𝐞𝐫𝐦 𝐂𝐨𝐧𝐭𝐫𝐚𝐜𝐭 𝐂𝐨𝐦𝐦𝐢𝐭𝐦𝐞𝐧𝐭𝐬 Strong, clear contracts provide security. Make sure contracts detail commitments, penalties, and timelines. These safeguards offer stability, giving you recourse if the supplier cannot fulfill obligations. 𝐀𝐬𝐬𝐞𝐬𝐬 𝐏𝐫𝐨𝐝𝐮𝐜𝐭𝐢𝐨𝐧 𝐂𝐚𝐩𝐚𝐜𝐢𝐭𝐲 & 𝐅𝐥𝐞𝐱𝐢𝐛𝐢𝐥𝐢𝐭𝐲 Verify that your supplier has the production capacity to handle any increases in demand. Flexibility to scale up or down as needed is essential, especially during peak seasons. Suppliers with adaptive systems are more capable of handling fluctuating demands without compromising quality. 𝐀𝐧𝐚𝐥𝐲𝐳𝐞 𝐒𝐮𝐩𝐩𝐥𝐲 𝐂𝐡𝐚𝐢𝐧 𝐃𝐞𝐩𝐞𝐧𝐝𝐞𝐧𝐜𝐢𝐞𝐬 Understanding your supplier’s own supply chain network is critical. If they depend heavily on certain raw materials or secondary suppliers, this could expose you to risk. Ask questions about their sourcing partners to assess vulnerabilities. 𝐂𝐨𝐧𝐬𝐢𝐝𝐞𝐫 𝐑𝐢𝐬𝐤 𝐌𝐢𝐭𝐢𝐠𝐚𝐭𝐢𝐨𝐧 𝐰𝐢𝐭𝐡 𝐈𝐧𝐬𝐮𝐫𝐚𝐧𝐜𝐞 Investing in business interruption insurance can be invaluable. This coverage can protect your operations if a supplier fails, allowing you to maintain continuity with minimal disruptions.

A to Z of Tractor Lending: A Field Guide for Modern Agri Lenders A – Applicant Profiling Understand the borrower’s landholding, cropping pattern, and repayment capacity. B – Brand Preference Track regional brand popularity and resale value—brand matters in valuation. C – Credit History Check credit scores (CIBIL/Experian) to assess past repayment behavior. D – Down Payment Ensure a reasonable margin to confirm borrower commitment and reduce risk. E – Eligibility Criteria Set clear income, land ownership, and age criteria for smooth processing. F – Field Verification On-ground checks of farm size, usage intent, and equipment condition are crucial. G – Guarantor Requirement Evaluate the need for a co-applicant or guarantor based on profile strength. H – Hypothecation Ensure clear documentation and registration of hypothecation with RTO. I – Insurance Mandate comprehensive insurance—protects both asset and borrower. J – Joint Liability Groups (JLGs) Consider JLGs for small/marginal farmers lacking formal credit history. K – KYC Compliance Strict adherence to KYC norms helps avoid future legal or fraud issues. L – Loan-to-Value (LTV) Ratio Balance risk and affordability—ideally keep LTV within regulatory norms. M – Maintenance Awareness Educate borrowers on timely maintenance to ensure asset longevity. N – NPA Monitoring Set early warning systems to identify stress signals and act promptly. O – Operational Training Partner with dealers to offer basic tractor handling and upkeep sessions. P – Prepayment Options Offer flexible repayment and prepayment terms to encourage responsible borrowers. Q – Quick Disbursal Streamline documentation and verification to enable timely fund release. R – Residual Value Assess post-loan asset value to guide refinance or repossession decisions. S – Seasonality Mapping Align EMI cycles with crop harvest and cash flow periods. T – Tenure Flexibility Offer custom loan tenures to match income cycles and tractor type. U – Usage Verification Track actual tractor use—agriculture vs commercial—for risk assessment. V – Valuation Protocols Use standard valuation tools and local insights to avoid under/over financing. W – Write-off Strategy Define clear criteria for write-offs while exploring recovery channels. X – X-Factor: Relationship Building Build trust—strong borrower relationships reduce delinquency risk. Y – Yield-Linked Structuring Innovate loan products linked to estimated crop yield or income. Z – Zero-Tolerance for Fraud Implement strong fraud detection and dealer network due diligence. #agriculture #tractor #rural #NPA #farmer #farming #credit #agricredit #risk #kcc #banking #farmerlife #technology #finance #india #agribusiness #kyc

Premature disclosure kills leverage. I’ve sat in too many rooms where a good company lost millions of value—not because of bad numbers, but because the founder gave away too much, too early. Customer lists. Pricing. Product roadmaps. Vendor terms. Even source code access. It feels “helpful” in the moment. But to the wrong buyer, it’s ammunition. 👉 What this looks like in practice: - A competitor learns your top ten accounts and calls them—six months later. - A buyer rewrites your pricing model against you. - A PE fund re-frames you as an “add-on” instead of a platform. None of this looks like theft. It looks like you volunteered it. So what’s safe to share early? - Anonymized revenue by segment - High-level retention and churn rates - Top five customers (as a % of revenue, not by name) - Sales cycle length, win rate, average contract value - Unit economics—without exposing vendor terms or pricing grids And what to hold until later stages? - Named customer lists & pipeline - Pricing ladders and discount rules - Vendor contracts that reveal your margin - Source code access or repo links - Sensitive employee or client data A staged disclosure model: - Interest: Narrative + anonymized metrics. - NDA & intent: Redacted examples, policy docs. - Shortlist/late stage: Selected named references. - LOI signed: Deeper files in a monitored, watermarked data room. - Pre-close: Only essentials tied to final bring-down. Example responses I use for clients: - Buyer: “Upload your full customer list.” - Response: “We’ll share anonymized concentration and retention now. Named references post-term alignment.” - Buyer: “We need code access.” - Response: “Here’s an architecture overview and security report. Scoped, read-only repo access post-LOI.” - Buyer: “Send pricing grid.” - Response: “Here are realized margins and ACV by segment. Full grid available once LOI is in place.” Two non-negotiables I set: ✔ Every sensitive file lives in a controlled, watermarked data room. ✔ Every disclosure is tied to a purpose, a stage, and a documented request. Because trust is earned in stages. And disclosure should be, too. You don’t protect value by saying no. You protect it by saying yes—at the right time, with the right guardrails. 👉 Want to see the full framework buyers actually expect—and how to protect yourself? Check the Sellability Checklist in the comments. #MandA #ExitPlanning #DueDiligence #BusinessValuation #FounderAdvice #DealMaking

Bond yield of 1900%? Yield to Maturity or YTM of a bond is the total rate of return an investor could get if it is held till maturity, expressed as an annual rate. From about 5% yield three years back, a private property developer in China, Country Garden's 8% coupon bond maturing in Jan 2024, was trading at more than 1900% yield last week. The bond prices have plummeted due to concerns about the company's debt problems. As a result yields skyrocketed (inverse relationship). Nobody expects company to repay the bond debt and hence no takers. There have been downgrades from credit rating agencies for this high-risk corporate bond. With steep fall in bond prices and with less than six months for maturity, the yields went through the roof. These incidents are just a reminder to us that corporate bonds come with credit risk. And higher yields are to compensate investors for the additional risk involved. And assessing credit worthiness and financial stability is key before investing. Yield data from bondsupermart.com

ICE BofA CCC & Lower US High Yield Index Effective Yield tracks the U.S. dollar-denominated corporate bonds rated CCC or lower by Moody’s, S&P, and Fitch. High Yield = Junk Bonds CCC & Lower = Deep Junk (These are the riskiest corporate bonds still trading in the market. They're close to default or have high perceived risk of default). This chart shows what yields investors demand to take on very high credit risk. A higher yield means investors are more worried about defaults and are demanding a substantial premium compensation. It's also used as a market stress indicator ie. when yields spike, it can signal market volatility, deteriorating credit conditions, recession fears, liquidity crushes or high profile corporate defaults. Ket Takeaways from a historical standpoint: - 2001–2002 (Dot-com bust + Enron): Yield peaked around 25% — extreme risk aversion, surge in defaults. - 2008–2009 (Global Financial Crisis): Yield skyrocketed to almost 40% — record-high panic, massive credit freeze. - 2015–2016 (Energy sector mini-crisis): Yield rose due to defaults in energy and mining sectors. - 2020 (COVID shock): Yield briefly spiked to ~40% again — total risk-off environment. - 2022–2023: Yields rose steadily, likely due to Fed rate hikes, inflation fears, and economic slowdown. Where are we now? The latest reading is ~15%. It is well below crisis levels like 2008 or 2020 but certainly well above long-term average. It currently suggests that credit markets are pricing moderate risk, but still fortunately not full-blown distress. If yields fall back to our averages, this would signify returning confidence and environment of credit conditions improving (risk on environment) Keep a close track of the this as it’s often used as a leading indicator of economic or credit deterioration, especially when it diverges sharply from BB-rated or investment-grade yields.

Last week, a court declined to dismiss a trade secret theft claim brought by an acquisition target against its would-be acquirer. See https://lnkd.in/gBZNRU85. The case reminds us of the importance of protecting proprietary information during M&A.   In short, the target was a company that purportedly created the “world’s first rapid blood alcohol detoxification product.” During diligence, the would-be acquirer requested detailed information about the target's product including the formula, ingredients (with quantities), and manufacturing process. The target provided this information, subject to a signed non-disclosure agreement (NDA).    Three months later, the acquirer purportedly announced "plans to create a drink that [was] almost identical" to the drink the target shared with the acquirer. According to the target, 16 of the 19 ingredients overlapped, and a "key element" of the acquirer's formula "could only have come" from the target.             We don't know the merits of the lawsuit yet, but what can sellers do to prevent this situation?   1. As an initial matter, consider not producing the sensitive, proprietary, or trade secret information during diligence. Typically, acquirers have no legitimate need to access the target's specific formula, manufacturing process, or ingredients as part of an acquisition. There are other (often better) ways for a seller to prove that a product actually works or is inexpensive to manufacturer, such as independent studies and customer testimonials. An acquirer can also require that the seller provide representations and warranties about the effectiveness of its product or its costs to manufacturer the product.   2. If you must produce proprietary information, consider implementing a "clean room" and "clean team." A "clean room" is basically a secure data room within a data room, which is used to share restricted information. Typically, the information in a clean room can only be viewed by the "clean team"--usually the receiving party's outside advisors (e.g., independent consultants and outside counsel). These parties are often permitted to provide their clients with a summary of the documents, but not their actual contents.   3. Finally, consider assessing the security of your virtual data room provider. Even organizations with robust third-party risk management (TPRM) programs often assume that their data room provider has implemented appropriate controls without doing any independent assessment.    Remember that protecting trade secrets during diligence is potentially advantageous to all parties to the transaction. In a case like this one, it is possible that the acquirer had already come up with a similar formula and the exchange of information in diligence provided it with no new information. Nonetheless, the acquirer may still face an expensive, distracting, and time-consuming litigation and potential harm to its reputation. All of this may have been avoided with appropriate protective measures.