Trinidad and Tobago Unit Trust Corporation
Notes
to the Consolidated
Financial Statements
FOR THE YEAR ENDED
31 DECEMBER, 2012
Expressed in
Trinidad and Tobago dollars
A43
Credit risk
Collective Investment Schemes -
Registered as local unit trust schemes
The Funds’ holdings of debt instruments expose them to the
risk that issuers or counterparties may default on their financial
obligations, that is, fail to make full timely payments of scheduled
interest and/or principal sums. Default risk has the potential to
lower net asset value or fund earnings in the event that part or
all of the scheduled cash flows become uncollectible after being
past due for an extended period of time. This risk of loss may be
tempered by the availability of realizable collateral that enhances
the potential recovery value on the debt instrument.
Default risk is managed at the outset by subjecting all issuers/
counterparties to a robust credit risk assessment process that
results in the assignment of a credit score or rating. The acquisition
or retention of a debt issue is subject to the credit rating limits and
constraints contained in each Fund’s investment policy statement,
and any other relevant factors. It is the Corporation’s policy that a
credit rating review of each issuer/counterparty be performed at
least annually.
29) FINANCIAL RISK MANAGEMENT
(continued)
The overall Fund exposure to default risk is measured by
monitoring the relative credit quality of the issuers making up
the fixed income portfolio. Issuers/counterparties that are rated
at least BBB- equivalent by international credit rating agencies or
that have an internally determined credit score consistent with
such a credit rating are deemed to have a high credit quality.
Issuers/counterparties that are rated CCC equivalent and below
by international agencies or have an internally determined score
consistent with such a rating or that are past due or otherwise
distressed or that are exposed to considerable short-term
economic/industry/project risk are all deemed low credit quality.
All other issuers/counterparties are considered to be of moderate
credit quality.
The internal credit quality rating is mapped to comparable external
rating grades as per the following table:
Unit Trust Corporation
Annual Report 2012
