Zeta Services Inc. Supply Chain Application July, 2009.

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