Credit risk management

Pendal$$s position on the company reflects its view that the social risks around high sugar and its links to diabetes and obesity have not been priced in to the issuer$$s credit spread and hence Pendal expected CCL$$s credit spreads to underperform over time. There are also regulatory risks surrounding potential imposition of sugar taxes in key markets. From a financial perspective, CCL$$s credit spreads have been tight and, in Pendal$$s view, have not factored in social risks relative to similarly rated issuers.Pendal$$s credit analysis process incorporates fundamental issuer analysis and proprietary quantitative modelling to assess investment opportunities. In particular, the credit selection framework focuses on four categories:

$1.$ Business profile $($such as competitive position and quality of management$)$;

$2.$ Financial profile $($such as cash flow metrics and debt maturity schedules$)$;

$3.$ Risk factors $($including regulation and funding sources$)$; and

$4.$ Valuation factors $($such as relative value, technical and covenants strength$).$

ESG factors are typically captured in the business profile and risk factors categories. Pendal$$s credit selection framework is based on an integrated credit research approach that includes considering its equity team$$s research as well as internal and external ESG research. Pendal$$s issuer research is significantly enhanced through collaboration with its equity teams to obtain insights from their investment analysis and direct company engagements, as well as discussions with Pendal$$s head of responsible investments regarding ESG issues that are deemed material to the issuer being reviewed. This broadened research approach promotes a more dynamic process with greater awareness of market conditions. Both the credit selection process $($applied across all of Pendal$$s income and fixed interest funds$)$ and the dedicated sustainability screening process incorporate internal and external sources of ESG information. The third$-$party ESG data providers conduct in$-$depth analysis of issuers$($CCL in this example$)$ non$-$financial characteristics and risks using their independent ESG research.

Question $1$

Discuss the Pendal credit analysis process