How to effectively manage a credit

One typical reason for spread differentials between bonds of the same rating are liquidity considerations, particularly with respect to stress situations. enerally, bonds with a large issue size, issued recently and actively traded by several market makers tend to be the most liquid. Sometimes old bonds with a small issue size, too, trade at rather tight levels. This is often the case for typical “CDO (Collateralized debt obligations) names”, that is bonds that are often included when CDOs are set up. Another reason for wide spread differentials between issuers with similar credit quality is that many market participants are concerned with potential mark-to-market losses. Therefore, rather illiquid and more volatile bonds require a higher spread, even if spread volatility is rather due to market technicals than uncertainty regarding company fundamentals. Consequently, it is natural that credit spreads differ even for bonds and issuers with the same rating.

But more importantly, only a fraction of the actual credit spread is explained by credit risk, which in turn is reflected by the rating.

This means identifying customers with the greatest profit potential, rather than the ones who are most profitable now. Businesses often try to be all things to all people, disregarding the need to retain a focus on the most profitable parts of the market. Customer loyalty may be important, but if the cost of ensuring a customer’s loyalty outweighs the benefits
and revenue of that customer, why bother? Maintaining market share for its own sake is often an unwise approach. If a customer cannot be retained without losing money, then it is better to lose that customer and focus on those that will help improve profitability.

I’ve seen quite a wide variety of budgets over the years, ranging from three or four things written on the back of a cocktail napkin, to high-tech spreadsheets that would make NASA look stupid.

More often than not, they’re either too simple or too complicated to be effectively used. If they are too simple, you lose the ability to understand exactly where your money goes and why. If they are too complex, you overwhelm yourself with data to the point of becoming paralyzed by all your options.

I’d suggest a middle road that starts with our formula for discretionary income. In other words, there are three categories that all budget items fall into: income, fixed expenses, and variable expenses. Within each one of those categories, you will break down your expenditures by company, payee, or store. In other words, you’ll put everything you buy at ABC Supermarket on one line, instead of breaking it down into further categories such as dairy, meats, cleaning supplies, etc.