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Tuesday, November 1, 2016

Accessible Credit Risk Tools for Chinese Executives

T3P LIMITED is pleased to advise that the Chinese language (Mandarin Simplified Characters) version of Global Credit Management - an Executive Summary is available.

The Authors are grateful to have had this opportunity to make such key information accessible to Mandarin literate executives and students. The original English text was adapted prior to translation in order to ensure it would be understood in the reader’s context.

This book is ideal for Chinese business executives of all types; Chief Executives (CEOs), Chief Financial Officers (CFOs), Treasurers, Credit Managers, Entrepreneurs starting or running their own businesses, and students of business practice preparing to face the tough challenges of business management.

It has been designed to provide the essential basic information needed to understand payment risk management in a domestic and international setting, with the addition of a practical tool kit covering the essential aspects.

Above all it is easy to read, Dr Jing Zhang commented; "I have enjoyed greatly reading this book as it has presented this complex subject in a very light and lively manner. The authors have summarised the entire world of credit management within an effective length, focusing on the practitioners’ perspective."

Professor Yang commented; "I believe this book should be extremely useful and helpful for Chinese firms and managers to learn about international practices and standards in credit management and improve their competitiveness."

The Hong Kong based magazine Asset Publishing & Research Ltd reported on October 28; “Taiwan and China are the markets that are the least 'credit-friendly' in the region with less than 40% of respondents conducting business-to-business (B2B) sales over credit, a new survey shows.” The result of this research strongly supports the notion that the practical skills and knowledge imparted in this book are urgently needed in China. (http://www.theasset.com.hk)

Click here to read the introductory pages, which have been translated into English to enable you to judge the book's value for yourself; the original Chinese text is also included.

The book (ISBN: 978-988-99586-1-9) consists of 250 pages; unfortunately the Paperback version is out of print so only a PDF electronic format is available. To purchase the electronic version (an eBook) click here.

BarrettWells

Thursday, February 18, 2016

Oil Major Executives need to stop dreaming and reinvent their businesses…

Quoted by the Financial Times on Valentine’s day: “Philip Verleger, an energy economist, argues that ‘nightfall is coming’ for big oil companies, threatened on one side by the rise of renewable energy and climate policies that will curb the growth of fossil fuel demand, and on the other by the smaller, nimbler companies that lead the shale oil and gas industry.”

“The companies that are wedded to high-cost projects, like deep water in Brazil, are going to have to take some large write-downs,” he says. “The likelihood that those investments are going to pay off over the next 20 years is extremely low.”

Companies that put their hopes on a strong rebound in oil “aren’t going to make it”, he adds.

In fact anyone who has watched Jeremy Rifkin’s presentation on the Third Industrial Revolution & a Zero Marginal Cost Society (view it here: https://youtu.be/5mQj574Cv_k ) will realise that fossil fuel prices will not recover sufficiently to make current or future oil-major funded and developed large projects viable.

Oil Major Executives should abandon their pipe dreams about the golden days of crude prices returning, as they did before the previous price dip crises; el Dorado will not rise again from the mists of the future.

There is an oil glut because oil is in less demand; a fundamental shift towards renewable sources of energy has taken place and is gathering speed.

Oil Exec’s should take on-board Ms Nadya Zhexembayeva’s advice and reinvent their business models; her short but telling evocation to reinvent can be viewed here: https://youtu.be/f4kySpcdvFg

It is time to acknowledge that Change has Changed and to Embrace the Exponential.

Investing in renewable energy production, storage and distribution infrastructure is the only viable future strategy for the medium and long term.

Thursday, January 14, 2016

Surviving the Deviant Risks that KILL Businesses – Don’t do ‘a Volkswagen’

A happenstance that occurs for the first time and causes serious, usually fatal losses for a particular business, an industry or a whole system – the financial system for example – has become known as a Black Swan Event but is also termed an Unquantifiable Uncertainty.

Unquantifiable because there is no data relating to the past on which to base a probability model, so no way to estimate the loss that may be incurred when the event happens.

Uncertainty is an alternative word used to describe a risk or uncertain outcome; in this case a detailed description of the risk event cannot be imagined therefore specific avoidance, corrective or remedial actions cannot be organised.

The Board and Senior Executives of Volkswagen AG should have realised that an extreme risk event could strike the business at any time. That is assuming that they had read or heard of The Black Swan by Nassim Nicholas Taleb. If in fact they were aware of the chameleon in the room that could destroy the business – in the form of an unimaginable risk with devastating potential – they did not prepare to deal with such an event.

Perhaps they thought that since they could not imagine what may happen to overwhelm VW Group they should simply wait for a crisis to break and then thrash around, blame each other, fire people, apologise, ‘re-arrange the deckchairs on the Titanic’ and put aside a hopelessly inadequate €6.5 billion.

Unimaginable Risk Drivers must not be overlooked simply because they cannot be imagined, described or counted. They will occur in the future and they are the risks most likely to destroy real businesses.

The Financial Times article of September 30, 2015 titled Seven Reasons Volkswagen is worse than Enron states: “The stock collapse is only the beginning. Potentially irreparable reputational damage, a crisis of confidence and massive legal liabilities could do the company in.” Volkswagen AG’s (stock) price dropped from 213.45 on July 2nd to 96.50 on October 1, 2015.

Most physical business Board Risk Committees, Chief Risk Officers, CEOs and business Owners only pay attention to assessing and managing those risks for which data is available. They follow the banking fraternity’s love affair with risk and probability models, which naturally cannot be produced in the absence of data. Of course that means that when unimaginable risks occur they are totally unprepared to manage the fallout, so they miss opportunities to limit the damage and/or opportunities to capitalise on the resulting market turmoil.

The consequences that ensued in the wake of Lehman’s collapse in September 2008 negatively affected the lives and livelihoods of millions of people in every corner of the Globe, and will continue to do so for at least a decade. However the purchase of Bear Stearns (including its valuable New York office building) in the midst of this Extreme Risk crisis is an example of a survivor (J P Morgan Chase) taking over a failing competitor based on ‘fire sale’ asset values; asset values were falling rapidly as inter-bank credit evaporated and banks frantically chased cash to meet margin calls and other obligations falling due.

Despite all the previously unimaginable disasters that have occurred there is a widespread naïve belief that mathematical models can foretell future risk. However models cannot because they use historical data, ignore data projections that fall beyond 99.7% probability, include too few variables and use simplified assumptions.

In the face of rapid change and globalisation, data driven risk management methods alone are no longer adequate. Unquantifiable Uncertainty Risk cannot be modelled because there is no data, so cannot be covered by traditional risk management practices or insurance; moreover extreme risk events (Black Swans) occur relatively frequently and result in business failures.

Business leaders are ‘risk managers’ entrusted with safeguarding the jobs of their employees and the assets of their investors therefore they must take seriously the possibility that those jobs and assets could be destroyed by an unimaginable extreme event.

Operating in the real world of business, as opposed to the purely financial world that only makes money, means facing future risks; hence Risk Management is about Managing the Future.

The challenge is that the Future does not exist; the past existed but only the present exists – one moment at a time. Therefore we cannot know the Future; in order to fulfil our responsibility to manage the Future we must imagine it and anticipate it. Three factors work in our favour as we attempt to anticipate the Future:

The Future is constrained by the existing environment both physical and social – it comes from today carrying the baggage of the past,

One major set of variables that shapes the Future is the collective decisions made by the world’s seven billion citizens, some of whom have more influence than others, and

As William Gibson said in 1993; “The Future is already here - it’s just not very evenly distributed.”

Searching the web and reading books such as An Optimist's Tour of the Future: One Curious Man Sets Out to Answer "What's Next?" by Mark Stevenson and watching TED.com talks like Nadya Zhexembayeva’s To Hold On, Let Go; also available on YouTube, can provide a lot of material to help create planning scenarios.

Of course the other set of variables that shape the Future is provided by Nature and Major Impact Events that result in one or a combination of the following categories of risk; Black Swan Event Risk, Liquidity Risk, Operational Risk, Concentration and Correlation Risk, and Lack of Flexibility and Agility Risk.

All of these risk variants could strike a real business as a result of a catalyst that was previously unimaginable.

In all cases except the first mentioned (Black Swan Event Risk) it is possible to take pre-emptive practical steps to protect a business; for example reinventing the business model every three and half years, as Ms Zhexembayeva recommends, could avoid the negative impact of the Lack of Flexibility and Agility inherent in most businesses today.

On the other hand the most challenging variables that shape the Future are those caused by Nature and Major Impact Events, collectively often called Black Swan Events. When such events have arisen in the past they have caused many real businesses to fail – thus destroying jobs and investors’ assets.

Therefore Executives and Owners in real businesses wishing to prepare to deal with and possibly profit from a Black Swan Event, require an entirely new approach in order to be adequately prepared to manage the fallout. Otherwise they risk missing opportunities to limit the damage and/or to capitalise on any bargain arising in the resulting market turmoil.

Black Swan events that were unimaginable before they happened have occurred frequently in the recent past, some examples of those that had global impact are listed here:

1990 US High Yield (HY) bond market collapses
1991 Oil price surge
1992 Swedish banking crisis
1994 Mexican crisis
1997 Asian crisis
1998 Russia default, Rouble crash, Long-Term Capital Management LP (LTCM) collapse
2000 TMT (Technology Media & Telecoms) collapse (a.k.a. Dot-com Bubble)
2001 9/11 payment system disruption
2002 Argentina crisis
2004 Russian banking crisis, Indian Ocean tsunami
2008 Global credit crisis
2010 Greece
2011 Japan triple tragedy - force 9 quake, massive tsunami and Fukushima nuclear melt-down
2014 Rouble in free-fall
2015 Euro – Swiss Franc (EUR-CHF) exchange rate CAP removed

Black Swan events are generally comprehended in respect of Financial Institutions and systemic catastrophes, as illustrated by the above listed examples. Nevertheless lesser and often more local events with the same devastating consequences and bearing the same characteristics often occur. These mini- or industry specific or geographically localised or single supply chain related incidents may only directly touch a single business, a group of connected businesses or the businesses within a region however they almost inevitably prove fatal in respect of those businesses directly or indirectly affected.

This is due to the fact that leaders in the vast majority of businesses do not prepare to deal with the fallout that follows unimaginable events; the associated risks are ignored simply because they cannot be imagined, described or counted.

Therefore, should an Unquantifiable Uncertainty strike, the corporate entities' equity capital becomes the last line of defence against bankruptcy.

Although bankruptcy of failed businesses is considered part of the capitalism notion of creative destruction it is not a satisfactory outcome as it destroys jobs, destroys investments and often devastates communities. Hence it is preferable that business leaders prepare to ensure the survival of their business regardless of what may happen to threaten its future.

Having recognised the Unquantifiable Uncertainty risk category the first sensible step to take is to anticipate the potential maximum future loss that could result from such an occurrence. Armed with this information the leadership team should think through and discuss possible defensive measures that could be taken in order to protect the entity's capital and ongoing concern status.

The aim of such preparation would be to arm executives with an array of possible action steps that could be tailored to any situation that may arise, thus enabling them (a) to react immediately and effectively in any extreme situation and thereby (b) to be in a position to capitalise on the opportunities that are bound to arise in the wake of such situations.

As a first planning step the size of the challenge can be estimated by aggregating the ‘forced sale’ net disposable value of the entity’s assets; which could be referred to as the ‘Maximum Covered Liabilities’ (MCL) if no management action is initiated. In other words the MCL is the amount of the liabilities that can be paid using asset sale proceeds, the balance of the liabilities plus equity and reserves can be termed the 'Maximum Uncovered Liabilities' (MUL).

The MUL minus the Equity Capital could be referred to as the ‘Owner Protection Gap’ (OPG). Preparation for dealing with a Black Swan event should focus on identifying actions that could be taken to reduce the OPG in the face of an Extreme Risk situation.

Black Swans can be positive as well as negative, depending on the circumstances; Black Swans are also ‘scalable’, meaning the consequences positive or negative, have unknown limits.

In The Black Swan, Nassim Nicholas Taleb wrote; “Knowing you cannot predict does not mean that you cannot benefit from unpredictability. The bottom line: be prepared! Narrow-minded prediction (based on mathematical models) has an analgesic or therapeutic effect. Be aware of the numbing effect of magic numbers. Be prepared for all relevant eventualities.”

In short, Mr Taleb suggests that one should; “learn to distinguish between those human undertakings in which the lack of predictability can be (or has been) extremely beneficial and those where failure to understand the future caused harm, invest in preparedness, not in prediction. Chance favours the prepared but do not prepare for something precise, Black Swans cannot be predicted; and seize any opportunity, or anything that looks like an opportunity because opportunities are rare, very rare.”

Nadya Zhexembayeva, in her TED.com talk titled To Hold On, Let Go – Forget ‘Built to Last’ Build to Reinvent, suggested that those operating real businesses “must remake who we are, what we offer, and how we deliver our offerings to the world. Take the essence of what you are, and let go of everything else; because the business you are in today (will) not be the business you’ll be in three and a half years from now.”

Invest in Preparedness, not in Prediction

Business leaders are more likely to succeed in their most important responsibility, which is to protect the jobs of their employees and their investors’ assets, by being prepared to act effectively when a previously unimaginable risk driven event occurs and by reinventing their business model often enough to avoid becoming obsolete in the face of rapid change.


Ron Wells is the author of The Chameleon in the Room: Embrace Business Risk – Assure Survival & Growth, refer to www.t3plimited.com for more information.

Friday, November 27, 2015

The Chameleon in the Room has a 5 STAR review on Amazon.com

Recommended to everyone who wants to deal with business risks successfully!

Five Star Review by Andriy Sichka on November 26, 2015 Format: Paperback

I always had a feeling that knowledge of the theory is only one part. Another, much more difficult one is finding a way to apply it in practice. Reading The Chameleon in the Room resolved majority of my doubts concerned with risk management. Written by a practitioner for practitioners the book shines the light on the areas left by theories in dark, and gives clear guidance for everyday practice. I recommend this book to everyone who wants to deal with business risks successfully!

Friday, October 2, 2015

Don’t be caught unprepared by an Extreme Risk Event, like VW Group. Learn how to survive if a unique risk strikes.

Perhaps the Board and Senior Executives of VW Group did not know about the fraudulent use of emission suppressing software. Reports of this nefarious scheme may well have been censored or simply left languishing in an inbox. In a bureaucratic organisation it is common for middle managers to avoid being the messenger bearing bad news.

However it seems reasonable to surmise that the leadership at VW Group did not create a culture with a higher purpose; such as to produce safe, economical, environmentally friendly vehicles at reasonable prices. Instead the purpose and culture instilled seems to have been to make as much money as possible and beat the competition at any cost; even though the website goal statement claims otherwise.

Therefore the leadership definitely bears responsibility for this calamity; the German saying ‘a fish smells from the head down’ comes to mind.

The CEO is said to have done the ‘right thing’ by resigning but what he has really done is strapped on his Golden Parachute and walked off the stage to enjoy a comfortable retirement, leaving others to clean up the mess.

This situation could well result in thousands of hard working honest VW employees losing their jobs and pensions. The Group reported Provisions for Pensions of €29.8 billion on its December 2014 Balance Sheet. It is troubling to note that this Provision does not appear to be matched by ring-fenced assets of the same value. The grim financial prospects of the Group in the light of the current crises are covered more fully later in this article.

The Board and Senior Executives should have realised that an extreme risk event could strike the business at any time. That is assuming that they had read or heard of The Black Swan by N N Taleb. If in fact they were aware of the chameleon in the room that could destroy the business – in the form of an unimaginable risk with devastating potential – they did not prepare to deal with such an event.

Perhaps they thought that since they could not imagine what may happen to overwhelm VW Group they should simply wait for the crises to break and then thrash around, blame each other and fire people, apologise, ‘re-arrange the deckchairs on the Titanic’ and put aside a hopelessly inadequate €6.5 billion.

Unimaginable Risk Drivers must not be overlooked simply because they cannot be imagined, described or counted. They will occur in the future and they are the risks most likely to destroy real businesses.

It is estimated that VW’s fines in the USA alone could amount to €18 billion if imposed in full. On top of fines in the USA will be the cost of reengineering non-conforming vehicles and the cost of settling compensation claims, with attendant legal costs. These costs will be multiplied by the number of other jurisdictions that take action; it is reported that Germany, France, India, Australia, Norway, South Korea, Switzerland and Canada have initiated investigations that could lead to prosecutions.

It is possible that VW will find the €6.5bn in cash ‘set aside’ woefully inadequate. Note in that respect that it closed the 2014 financial year with €18.6bn in cash plus €11.2bn in Marketable Securities and Time Deposits, having generated €10.8bn in Cash Flows from Operating Activities in 2014.

Commentators such as the Financial Times speculate that VW will have to find a great deal more cash than it had or has on hand; even if it has generated as much Cash Flow from Operations this year, as it did last year.

In The Chameleon in the Room – Chapter Two – I suggest that the leaders of every real business, from the smallest to the largest, should regularly anticipate the potential maximum future loss that could result from occurrence of an extreme risk event. They should jointly consider this number regularly and discuss possible defensive measures that could be taken in order to protect the capital and ongoing-concern status of the business.

The aim of such preparation would be to arm executives with an array of possible action steps that could be tailored to any situation that may arise. This would enable the leadership team to react immediately and effectively in any extreme situation to protect jobs and investors.

In the book I describe how Corporate Probable Maximum Loss (CPML) should be calculated in order to provide focus for a discussion as to steps to take in a future crises arising from an unimaginable cause.

In order to illustrate how the CPML should be calculated and used, I go on to work through an example based on the 2013 annual report of VW Group. The detailed work of this example can be studied in the book; of course at the time of writing The Chameleon in the Room there was no indication that VW would in fact face a crisis; this is a rare case when there was ‘such a thing as a coincidence’.

I have examined the 2014 annual report of VW Group and comment as follows on its financial prospects in light of the company-specific Black Swan Event that has occurred:

• Volkswagen AG Credit Ratings will determine its cost of borrowing and the availability of any short term and/or long term loans it may need to borrow in order to meet demands to pay fines, compensation and the cost of reengineering vehicles.

• Currently its credit ratings are listed as: Standard & Poor’s: Short Term: A-1, Long term: A, Outlook: Stable and Moody’s: Short term: Prime-1, Long term: A2, Outlook: Negative

• If VW’s credit ratings are downgraded its cost of debt will rise and obtaining funds via borrowing will become more difficult.

• Volkswagen AG’s share or stock price dropped from 213.45 on July 2nd to 96.50 on October 1, 2015.

• The drop in value of VW’s shares indicates that raising cash by issuing fresh stock is unlikely to be a popular option.

• The Financial Times article of September 30, 2015 titled Seven Reasons Volkswagen is worse than Enron goes further stating: “The stock collapse is only the beginning. Potentially irreparable reputational damage, a crisis of confidence and massive legal liabilities could do the company in.”

• VW’s assets as at December 31, 2014 included Intangible Assets of €59.9bn, which represented 27% of Noncurrent Assets and 17% of Total Assets. Intangible Assets in turn included €23.6bn in Goodwill, which is 39% of the Intangible total.

• Allocation of Goodwill by operating segment is stated as; Porsche €18.8bn, Scania Vehicles €2.9bn and others €1.9bn

• Arguably the serious nature of the transgression admitted by VW, which also touches its other brands, will have seriously diminished the value of this Goodwill. Although the Porsche Brand does not appear to have been involved in the wrongdoing so may hold its value.

• It is usual for conglomerates such as VW that face an urgent need for cash to sell assets. The sale or spin-off of Porsche may be a survival tactic to be employed.

• Current and Noncurrent Financial Liabilities that include Bonds, Commercial paper and notes, and Liabilities to banks amounted to €44.4bn at the end of 2014, which was 20% of Noncurrent Assets and 28% of Noncurrent Assets excluding Goodwill.

• Financial Liabilities of this kind may well be contracted on the basis that a Material Adverse Change in the circumstances of the Debtor (VW) would provide the creditor (bank, investor or bond-holder) grounds to demand immediate repayment or provision of collateral to secure repayment of the debt. Similarly VW may be party to margining agreements that would require increased cash collateral to be provided if its credit rating were to be downgraded.

According to its website Volkswagen Group;

“Operates 119 production plants in 20 European countries and a further 11 countries in the Americas, Asia and Africa. Every weekday, 592,586 employees worldwide produce nearly 41,000 vehicles, and work in vehicle-related services or other fields of business. The Volkswagen Group sells its vehicles in 153 countries.”

The Financial Times article referenced above comments that “Volkswagen’s (fraud) has endangered the health of millions. The high levels of nitrogen oxides and fine particulates that the cars’ on-board software hid from regulators are hazardous and detrimental to health, particularly of children and those suffering from respiratory disease.”

This fraud, which is fundamentally due to poor leadership, has also put at risk tens of thousands of jobs.

Tuesday, September 22, 2015

Why write “The Chameleon in the Room”? How does it differ from other Risk Books? Plus 20% discount offer.

My purpose in writing this book was to fill the gap that I perceive exists in the technical literature relating to enterprise risk management. To my mind Banks and Financial Institutions are well served by academia, since they have invested heavily in sponsoring research, but that research has focussed on producing data driven and probability orientated solutions.

Such solutions are by their nature backward looking since the only data that exists arose in the past and deduced probabilities are extrapolations based on data. Therefore those solutions only have limited reliability (a) in relation to risk drivers that occurred in the past and (b) in relation to large portfolios of risky transactions.

Some time ago this realisation led me to focus on a holistic future-oriented risk assessment and management approach, which is the foundation of this book.

The current and increasingly rapid rate of change in the global business environment has rendered data driven risk control methods inadequate. Therefore those responsible for the leadership, operation and survival of real businesses - and credit executives managing narrow B2B customer and supplier portfolios - cannot usefully employ probability based approaches.

Common business risks are well understood and can be anticipated, so owners or executives having read my book Global Credit Management – an Executive Summary, for example, will undoubtedly put in place measures to ensure the durability of their business should common risks arise.

However research and experience over the past 30 years has established that in most cases when businesses failed the cause was either:
A – An unimaginable risk driven by a unique occurrence, or
B - Due to the actions of incompetent or fraudulent management.

Incompetence and fraud are risk drivers that are well understood and managed through internal/external audits and, in the case of buyers and suppliers, by thorough analysis and careful on-going monitoring by credit risk executives.

However unimaginable risk drivers have thus far been overlooked simply because they cannot be imagined, described or counted.

Nevertheless they will occur in the future and they are the risks most likely to kill real businesses.

Examples of such risks are Black Swan Event Risk, Liquidity Risk, Operational Risk, Correlation-Concentration Risk and Ignored External Change Risk; hence my decision to focus attention in The Chameleon on these risks.

Assessment and management of common business risks is covered at a high level in the final chapter in order to round off the subject.

I am not an academic so I have written a practical work, with each challenge outlined and a practical example of a possible solution provided.

The book is available in Paperback, Kindle and pdf versions worldwide through all Amazon websites, CreateSpace eStore (http://bit.ly/1IzgTEg) and eStoreT3P (http://bit.ly/1LZhALZ).

T3P LIMITED is offering a 20%* discount on purchases of Paperback copies of The Chameleon in the Room from eStoreT3P, while stock is available. After recent re-stocking there are currently 25 books in stock. To qualify for the discount please use the promotion code BWT3P10-30 when placing your order.

Ron Wells

* The discount percentage associated with this promotion code may change from time to time but will not be less than 10%.

Tuesday, August 25, 2015

Capitalism has Spawned Three Classes of Risk Taker

Real Businesses build infrastructure or provide goods and services that enhance the quality of life for people; while providing employment. Their success and often their very survival depends on effective risk management.

Financial Institutions only make money. Their survival and success largely depends on employing other people’s money to make money. While they bear very little risk themselves they allocate most of any profit to themselves; the people whose money they employ bear any losses.

Consultants and Lawyers make a lot of money for themselves by advising others to make decisions (take risks) but take very little risk themselves.

It is Real Businesses that are the builders, the decision makers, the risk takers, the growth makers. Successful Real Businesses benefit societies globally.

Risk is the Context of Life - The Chameleon in the Room
Decision Making is Risk Taking because Outcomes are Unpredictable

The Chameleon in the Room explains risk assessment and management in Real Businesses.

Click this link for more information.