Ratings

The relationship of the industry to the economy and the possible impact of various economic scenarios, including the ramifications of legislation. More specifically, this includes:

• Importance of the industry within the economy
• Influence of inflation
• Need for capital
• Legislation and regulation
• Accounting changes and tax considerations

An analysis of the composition of the portfolio regarding type, mix, and diversity of receivables, and evaluation of growth prospects.

Basic receivables characteristics

1. Consumer versus commercial

2. Subportfolios

3. Size: absolute and relative

4. Off-balance sheet risk

Diversity

1. Geographic

2. Borrower/lessee

3. Type of product, manufacturer, supplier

4. Internal guidelines limiting concentrations

5. Lending criteria

Audit procedures and controls

Growth

1. Relative to peer group

2. Fundamental portfolio characteristics during periods of either rapid growth or decline

3. Portfolio performance regarding a quantitative assessment of the credit quality, by subportfolio

4. Strategy for expansion beyond current market

Credit quality

1. Contractual delinquencies

2. Charge-offs

3. Foreclosures/repossessions

4. Recoveries

5. Policies regarding payment definition, charge-offs, extensions, and business rewritten

Reserve adequacy

1. Coverage levels, trends relative to peers, and portfolio characteristics

2. Methodology for establishing reserves

3. Adjustments reflecting changes in the portfolio and the economic environment

Liquidity

1. Salability of receivables, time frame, market size, discounting

2. Realizable value of owned equipment and property

3. Asset securitization

An evaluation of nonfinance-related businesses.

Characteristics of activity

1. Risk versus return

2. Management participation

3. Prospects

Appropriate capitalization

Plans for future diversification

1. Acquisitions

2. De novo expansion

3. Divestitures

Analysis of capital leverage, debt maturity, and financing requirements.

• Appropriateness of total leverage in relation to generic guidelines and asset quality
• Mix of fund sources
• Debt servicing capacity
• Equity quality

1. Goodwill and intangibles

2. Equity investments

3. Excess of inadequate loss reserves

4. Understated assets and off-balance sheet liabilities

• Financing needs and plans

1. Short- and long-term financing requirements

2. Growth flexibility and access to capital markets

3. Projected changes in leverage

Examination of the company's philosophy and management of assets and liabilities, regarding maturity and interest rate sensitivity.

Interest rate sensitivity: assets versus liabilities

1. Percentage of floating-rate assets and liabilities, management philosophy toward interest-sensitive assets and liabilities on the balance sheet, and use of interest rate swaps

2. Percentage of assets where the interest rate can be fixed at specific levels

• Company policy regarding the matching of interest-sensitive assets and liabilities, and degree of tolerance for mismatching between assets and liabilities
• Maturity structure: assets and liabilities

1. Nominal and average life

2. Actual experience

Review of the company's performance based on profitability measures.

• Trend of key profitability measures—growth, yields, spreads, and returns, both absolute and relative to those of peers
• Level and volatility of profitability
• Expectations regarding future operating results in relation to past performance and that of peers

Discussion of the degree of strength derived from parent support.

• Nature of relationship
• Legal
• Financial
• Management
• Past support, and ability and willingness of owner-affiliate to provide added protection in the future
• Ownership-affiliation: strength or weakness

Evaluation of management's performance, policies, controls, planning, and depth.

• Strategic planning controls
• Response of management to changing conditions
• Management credibility
• Management philosophy toward acquisition, diversification, portfolio risk, and leverage

Analysis of accounting methods and comparison with industry practices.

• Auditor's report
• Conservative versus liberal accounting practices
• Write-off method and reserve for losses
• Treatment of intangible assets
• Accounting practices of nonfinance activities
• Off-balance-sheet liabilities and understated assets