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Advanced Credit Risk Analysis and Management by Ciby Joseph

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22

Security Basics

A good security is an ideal credit enhancement tool that shields against credit loss.

1815 was a crucial year for Europe. It ended the first attempt to create a European Union (Empire) by Napoleon, who lost the Battle of Waterloo. Napoleon would have won, but for the last line of defence of General Wellington. The Allied Army (the English Army under General Wellington and the Prussian Army under General Blucher) planned to put up a combined front against Emperor Napoleon, who was desperately trying to defend his Empire. Napoleon stole a march on them, defeated Blucher's Prussian Army at Ligny and pursued Wellington's English Army. With no choice, Wellington withdrew his forces with an urgent request to General Blucher to reunite with any remaining forces. Finally Napoleon engaged Wellington at Waterloo. The English Army was on the brink of defeat, but the last line of the English defence held till the Prussian Army contingent arrived and the rest is history.

Likewise, in credit risk, if everything fails or is likely to fail, a creditor's last line of defence is the security, if available. In the previous sections, we discussed how to defend against credit loss by ensuring that the credit facility will be repaid from the internal cash generation of the business. Analysis of the external environment, industry, company and financials, as well as the study of systematic and unsystematic risks and techniques to mitigate both portfolio and obligor risks, were all ...

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