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.

Sales, marketing and brand management decisions can be as difficult as they are important. Below are some of the issues that may need to be considered on a regular basis.

• How elastic are product prices? Could prices be increased without reducing revenue?
• When is the next price rise planned? Could it happen sooner?
• Are forces driving down prices in your market? What are they and how can you counter them?
• Who fixes prices in your organisation? How do they do it and could the process be improved?
• Are discounts targeted at the right sectors, or are they needlessly eroding profitability?
• Could pricing be used more aggressively?
• What are the barriers to entry in your market? How much of a barrier are they? Could you make it even harder for competitors to enter the market?
• When is the best time to enter or leave the market? Can action be taken to discourage and reduce the effectiveness of competitors entering?
• If you are planning to enter a new market, what makes your offer distinctive and likely to succeed?
• Are other firms entering the market? If not, why?