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.

Once a profile of potential customers has been drawn up and their needs and wants identified, it is then possible to:

• ensure that their needs are met and that the value proposition is compelling enough to sustain their interest;
• decide how best to appeal to this audience, considering everything from tone of voice to frequency of contact;
• decide how to engage the target market – when to ask for input, whether to offer discounts and generally how to ensure that the product offer is sufficiently attractive;
• decide how to capture details of enquirers so that they can be contacted later.

This list is by no means exhaustive. The trick is to start focusing on the target customers and ways of attracting them. It is also worth considering two other things. First, it is important to understand not only which customers to attract, but also which ones you definitely do not want to lose. Second, remember that the customer who makes the purchase may not be the person who decides to make the purchase or the end user, as is often the case with purchases by businesses.