Enron calculates the ECC for each company by taking the estimated probability of bankruptcy and multiplying this by the expected percentage of a claim that a senior ranking unsecured creditor would lose in the event of the company's bankruptcy. In its simplest form, the ECC can be expressed by the following formula:
ECC = Probability of Bankruptcy * (1- Recovery Rate)
This formula is then adjusted to account for credit differentials such as event discounts and liquidity factors.
You can think of the ECC as a premium for credit risk. It represents the premium over your own cost of funding that you may charge for producing credit to a particular company. The ECC is expressed as a simple interest rate. For instance, it costs more to extend credit to a company with an ECC of 2% than to a company with an ECC of 1.5%. On our website, the ECC is listed for several time periods. You can select the ECC for the time period that best matches your credit exposure.
| Example: You have a one-year contract with company X and you have estimated that under this contract you have credit exposure of US$2 million. You see that the one-year ECC for this company is 1.5%. Therefore extending credit to this company for one year is costing your company US$30,000 (i.e. US$2,000,000 * 1.5%). |
 Please click here if you would like to download a copy of the Enron Cost of Credit Brochure (PDF file).
You will need Adobe Acrobat installed on your machine in order to view the document.
To view ECC information for thousands of companies, become an Enron Credit member today.
For a more detailed discussion of the ECC and related topics, please see "Introduction to Credit Risk" under the Learn More section of this site.
|
