zeta services inc. supply chain application july, 2009
TRANSCRIPT
Zeta Services Inc. Supply Chain Application
July, 2009
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Outline
I. What Are The Objectives For Credit Ratings In Supply Chain Application?
II. What Is ZETA®?III. What Is A Credit Rating? IV. ZETA® ToolsV. What Are The Benefits Of ZETA® Risk
Control?VI. Companies CoveredVII. Process
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I.
What Are The Objectives For Credit Ratings in
Supply Chain Application?
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First, Avoid
Higher cost of replacement materials Delays in getting materials Delays in satisfying customers Contract penalties Wasted management time and effort sorting through
the confusion of a failing supplier Wasted time by buyers as they re-source key
components External workout expenses – specialty workout
consultants, attorneys, court costs, etc. Difficulty retrieving tooling, inventories or intangible
property – especially in foreign countries
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Second, Achieve Positive Goals
Know that suppliers have the financial capacity to deliver
Add the dimension of risk control to contractual relationships
Understand the risk dimensions of the supplier portfolio
Establish a measure of financial control over non-contractual costs of suppliers’ financial failure
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II.What Is ZETA®?
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ZETA®
is an objective methodologyfor quantifying credit risk
based on inputsfrom financial statements.
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ZETA®'s Objectivity is Achieved By:
Defining risk as the risk of bankruptcy
Statistical (unbiased) selection of the most discriminating factors
Statistical (unbiased) weighting of these factors
Thorough holdout testing
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A ZETA® Credit Score Consists of:
7 credit concepts
~40 financial statement variables
Most data is based on most recent year financial information
4 data items are used over 3 to 5 years
Most emphasis is on the capital structure
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III.What Is A Credit Rating?
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How Do You Slice A Distribution?
Credit Rating Distribution
-15 -12 -9 -6 -3 0 3 6 9 12 15
Credit Scale
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How Does S&P Slice The Distribution?
Distribution of S&P Bond Ratings for Corporate, Non-Utility, Non-Financial Issuers
CCC/CC/C(4%)
B's(24%)
BB's(23%)
BBB's(22%)
A's(19%)
AA's(7%)
AAA's(2%)
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Are S&P Ratings Ideal?
One-Year Default Experience for S&P Bond Ratings for Corporate, Non-Utility, Non-Financial
Issuers
DR =24.5%
CCC/CC/C(4%)
B's(24%)
BB's(23%)
BBB's(22%)
A's(19%)
AA's(7%)
AAA's(2%)
DR =6.4%
DR =1.3%
DR =0.3%
DR =0.05%
DR =0.07%
DR =0.00%
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ZETA® the Objective Credit Ruler
Links Between ZETA® and S&P Ratings
ZETA® Credit Score Break Points For Bond Rating Equivalents
-15 -11 -6.5 -0.6 2.6 4.9 7.5 10.8
-9.5 -8.0 -4.9 -2.8 0.9 1.8 3.4 4.1 5.6 6.5 8.6 9.7
- + - + - + - + - + - + - + - + - +
Zc Zcc Zccc Zb Zbb Zbbb Za Zaa Zaaa
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ZETA® the Objective Credit Ruler
Links Between ZETA® and Client-Defined Ratings
ZETA® Credit Scores Break PointsFor Company Rating Equivalents
-8.00 -6.25 -1.00 4.50 10.00
-4.50 -2.75 0.75 2.75 6.25 8.00
- + - + - +
5- 5 4 3 2 1
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How Does ZETA® Help a Company Create a Rating
System?Determine Distribution of Company Ratings
-15 -12 -9 -6 -3 0 3 6 9 12 15
5-15%
ZETA® Credit Score
5 6%
4- 7%
4 8%
4+ 7%
3- 9%
3 11%
3+10%
2-9%
27%
2+6%
15%
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How Does ZETA® Help a Company Create a Rating
System?Estimate One-Year Default Experience for
Company Ratings
-15 -12 -9 -6 -3 0 3 6 9 12 15
5- 15%
ZETA® Credit Score
DR0.00%
DR 0.12%
DR0.04%
DR 0.6%
5 6%
4- 7%
4 8%
4+ 7%
3- 9%
3 11%
3+10%
2-9%
27%
2+6%
15%
DR11.6%
DR8.2%
DR5.1%
DR3.8%
DR1.9% DR
0.1%
DR0.00%
DR20.3%
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How Does ZETA® Help a Company Create a Rating
System?
1 2 3 4 5 67 8
9 10 12+
22-
3+3
3-4+ 4
4- 5 5-0%
10%
20%
30%
40%
50%
60%
70%
CumulativePercent
Defaulting
Duration of Bond Exposure in Years
Company Rating
Estimate Long-Term Default Experience for Company Ratings
1 2+ 2 2- 3+ 3 3- 4+ 4 4- 5 5-
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IV.
ZETA® Tools
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ZETA® Allows Users To
Understand the financial strength of new and existing suppliers
Quickly understand the strength of the entire supplier portfolio
Evaluate how new suppliers affect the portfolio
Translate ZETA® credit ratings into default probabilities
Use default probabilities to model and manage risks
Control trends in the supplier network
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V. What Are The Benefits of
ZETA® Risk Control?
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Benefits of ZETA® Risk Control
Create a financial quality metric (a common language) for the supplier “portfolio”
Identify the weak links – the companies that need to be culled from the portfolio
Model decision or exit strategies Maintain order in the supply chain Create goals for upgrading the supplier
portfolio Measure progress toward meeting goals Avoid costs, including hidden costs,
associated with failed suppliers
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VI. Companies Covered
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Applicability
Companies that use accrual accounting
Companies presenting classified balance sheets
Public companies (~6000 North American companies and ADR’s)
Private companies
Small companies ($1,000,000) in sales
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Industry Exceptions ZETA® is not to be used for:
Banks Finance companies Insurance companies Municipalities Real estate development Real estate managers Savings and loans Broker/dealers and commercial banks Nonprofits based on fund accounting Companies that don’t provide accrual based financial
statements
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VII. Process
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Public Companies
Included in system:
North American companies and ADR’s
Updated for 10-Q information
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Private Companies – Choice 1
Company Finance Department Processes Data Confidentiality Agreement between Company
and Supplier Company Finance Department will prepare
Excel spreadsheets for input (or ask suppliers to do so)
Company Finance Department will process spreadsheets
Reports will be available on the system for buyers, sales, and finance
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Private Companies – Choice 2
Zeta Services Inc. Processes Data Confidentiality Agreement between ZSI and
supplier Supplier will prepare Excel spreadsheets for
input ZSI will process spreadsheets ZSI will provide reports to Company and add
results to Company database Reports will be available on the system