Credit and Counterparty Risk
Commercial, commodities and financial transactions expose Augustea Group to the credit risk, defined as the possibility that an unexpected change in counterparty's credit rating, from which there is an exposure, generates a corresponding impact on the credit position, in terms of insolvency (default risk) or variation in the market value (spread risk).
Recent macro-economic evolutions, in light of the current instability in financial markets and the global economic crisis, have demonstrated the potential exposure to losses in case a counterparty fails to perform or pay amounts due.
In order to ensure the governance of such risk, a formal credit systems and processes have been established to ensure that before trading with a new counterpart can start, its creditworthiness is assessed.
Potential charterers are rated in an internal process involving the Chartering, Legal and Finance functions. The assessment methodology assigns a score to individual clients based on publicly available financial data and capital, profitability and liquidity ratios. Based on those scores, an internal credit rating is assigned to each counterparty who is accordingly allocated to its proper risk category. The Group risk categories are comparable to those prepared by the main rating agencies on the marketplace. The Group's internal ratings are also benchmarked against ratings prepared by a specialized external source.
Chartering can only deal with accepted counterparties, except for:
- primary counterparties;
- short term counterparties, within a given duration limit (currently less than six months);
- voyage contracts.
Individual business units are responsible for managing credit risk arising in the normal course of the business, while holding finance is responsible to evaluate the recourse to additional protection measures on the insurance market.
Also credit litigation and receivable collection activities are assessed.
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