How to effectively manage a credit

One example from the automotive sector is the large spread differential between Ford and Renault bonds with similar coupon and maturity.

Although the rating agencies assign approximately the same credit risk to both issuers, investors view the risk that is related to owning Ford bonds as significantly higher. It clearly outlines that Ford bonds have been much more volatile than Renault bonds between September 2003 and February 2004. When S&P put Ford on credit watch negative on October 21, 2003, spreads widened massively. Even if only very few investors feared a multiple notch downgrade of Ford from the then BBB rating, a 1 notch downgrade to BBB coupled with a negative outlook would have caused concerns about a later downgrade of Ford into high-yield. There were fears that the high-yield market would not be able to absorb the large volume of outstanding Ford bonds, and from a fundamental perspective that the company’s financing costs would rise, thus limiting the company’s financial flexibility massively. This example highlights that market technicals at least temporarily can be the dominant driver of credit spreads.

Harley-Davidson used several methods to bond with its customers, and each one combines knowledge of individual customer’s needs with a cleverly judged appeal to their emotions. For example, the company’s managers regularly meet customers at rallies, where new models can be sampled with free demonstration rides. Advertising reinforces the image and perception of owning a Harley, persuading existing customers to stay loyal as much as attracting new ones. The Harley Owner’s Group (HOG) activities are central to binding customers to the company, and rather than providing trite or cheap benefits Harley devotes considerable resources to ensuring that its customers receive benefits that they value. Membership of HOG is free for the first year for new Harley owners and then a membership fee of approximately $40 is payable; over two-thirds of customers renew. It might seem easy to sell a product as exciting and appealing as a motorbike, but Harley-Davidson also manages to persuade tens of thousands of customers to keep on buying its machines, as well as paying to attend rallies where they enjoy themselves, make friends and provide valuable customer feedback. Some even tattoo themselves with the name of the company. How many businesses achieve that?