Tactical filters for today's higher risk environment.(selected topic)

We now recognize that poor risk underwriting in the subprime mortgage market has had a catastrophic impact on that segment. Similar problems have surfaced in the credit card and leveraged debt markets and will certainly affect all segments of the financing markets. So far, financial institutions have recognized over $100 billion in write-downs with more bad news almost daily, while the market sharply readjusts its risk/reward balance--e.g., increasing credit spreads, particularly for weaker credits and tightening financial covenants.

Given these conditions, many of The Alta Group's clients, from financing companies to trade creditors, have asked how to adjust their risk management approach in response to today's economic and credit conditions. A weakening economy, a reduction in credit availability from traditional sources, increased credit spread premiums with tighter conditions and the severely weakened dollar have degraded the risk landscape for our clients as they deal with their customer sets. Beyond considering process and structural changes such as adjusting pricing

and terms, changing delegation to include more senior management review and involvement, and strengthening internal risk resources and capabilities, in the short term, our clients are also attempting to filter more clearly which customers and prospects are most likely, in today's environment, to become problematic credits.

To supplement their normal assessment process, Alta is advising clients to also screen their existing and potential customers with additional tactical "filters" to put focus on credit requesters who are at greater risk in current conditions. Credit requesters identified in these filters should be subject to supplemental evaluation, either by adjusting the general methodology to do a more detailed financial analysis and/or requiring a higher level of review by management to assure experienced judgment is being applied to these potentially more sensitive names. The specific approach will vary by your type of business and the level of development of your risk infrastructure, but in some appropriate way, additional scrutiny should apply to higher risk sets.

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General Characteristics Filter

In economic downturns and periods of disruption in the credit markets, many companies will typically exhibit increased credit risk (and more so at the low end of the rating scale). However, with today's unique combination of factors, companies with particularly increased exposure may exhibit the following characteristics: