ECL Assessment for Utilities Company
Valtech’s valuation team has recently completed an expected credit loss (“ECL”) assessment for a Hong Kong listed utilities company.
In this case, our client’s counterparties are mostly PRC governmental entities. Although governmental entities’ credit risks are generally considered low, the differences among national government, provincial government entities and state-owned enterprises (“SOEs”) can be significant. Unfortunately, the credit ratings of provincial governments and SOEs are normally not evaluated by global credit agencies, leading to additional complexity in credit assessment. Thus, our value-added service is to provide a systematic way to assess the credit risk of provincial government and SOEs.
In our assessment, we have made reference to various market data including the credit spread of provincial government bonds, the provincial government’s GDP and their interest payment during the year, etc. Further integrating these considerations into the default credit assessment on overdue days, we can then provide a clear matrix for our client to assess the ECL rate for each counterparty based on both market data and actual overdue status. This not only helped our client to prepare their financial statements within the regulatory framework, but also strengthened their understanding of any potential credit risk they may face based on the current market trend.
