Paraphrasing an emailed question from Dominik (who IIUC is not from Australia): is there information out there about the credit risks associated with different categories of business? This is outside my zone (mostly retail, i.e. individuals).
Dominik asks: “I need to set up (for a loan granting purposes) a kind of a rating matrix for different unconnected types of business such as a poultry business or shipyard.”
IIRC in Australia there exists a well codified hierarchical classification of business types, starting at super categories (like agriculture, mining, ..) and moving through a couple of layers down to very specific categories (like “coffin maker”). Analysts concerned with non-retail credit risk would probably have some experience or information about the credit risk characteristics of these hierarchies, but, as Andrew has commented elsewhere, they would be reluctant to share this knowledge as it would be part of the bank’s competitive advantage. However, without sharing the content, perhaps some readers would share some analytical or modelling tips?
From very slight involvement I seem to recall that factors like size of the business, turnover, nature of assets, and (especially) recent financial performance could be more important than fine classifications of business type. Some of these in turn (like the assets) may be more relevant to LGD than to PD.
Dominik further: “I thought about comparing data from different stock exchanges considering some parameters like a market cycle etc”
This wouldn’t be an easy route, given that listed companies are a very select sample of all the medium to large businesses out there. However, there is plenty of received wisdom (and analysis) about cyclical versus non-cyclical sectors of any stock exchange and/or country. Poultry, and coffin makers: non-cyclical! But credit risk – as some recent ASX cases illustrate – will depend heavily on capital structure (gearing) and the management of that company.
Even with a poultry business, if the management borrows to the hilt and pursues an aggressive acquisition strategy, at the same time trying to challenge the purchasing power of the big retailers – they could easily end up with egg on their faces (sorry).
Any advices from those who work in the non-retail area would be a significant improvement on the above and would be