Market Insight

Assessing an operator’s capabilities in supporting effective asset performance
Wednesday, June 01, 2016

Australia Ratings’ Operational Capability Assessment provides an independent view on an operation’s capability to support its asset in performing as expected. Such capability is assessed via a ranking - from ‘Superior’ (highest strength capability) to ‘Failure to Perform’ (lowest strength capability).

Despite operations and businesses having strategies, opportunities and risks that are unique to themselves, there are general operational aspects on which a comparison can be made. A benchmark can be used to help compare an operation’s capability and effectiveness in supporting asset performance - both financial and operational.

Benchmarking Operational Capability

To illustrate, let us look at a scenario: An investor is considering different assets (in which to invest in) – a unit in a managed fund and a trade receivables system. The two types of income-producing assets cannot be directly compared when considering the potential risks to the reliability and stability of the income being produced. This is because they are utilised under different types of operations. However, after all key factors to the respective operations have been reviewed; an overall assessment of each operation’s capability to support its assets can be used by an investor or other counterparties for comparative purposes.

The table below outlines the two different operations mentioned above – AssetWatch Trade Receivables and La Trobe Financial Asset Management. The two assets have unique operational risks. We assessed the key factors (from Superior to Failure to Perform) relative to each operation and determined an overall strength of the capability of these operations to effectively support their income-producing asset. These overall assessments provide an investor or other counterparties an opportunity to benchmark against prescribed investment objectives.

Table 1: Operational Capability Assessments are comparable

Operational Capability Assessment rankings AssetWatch Trade Receivables La Trobe Financial Asset Management
Ownership, Performance and Outlook Superior Very Strong
Experience and Skill of Management and Staff Superior Very Strong
Governance N/A Very Strong
Governance – AssetWatch Operation^ Very Strong N/A
Governance – Trade Receivables Financing Facility Origination^ Superior N/A
Risk Management and Compliance Superior Very Strong
Custody of Fund Assets* N/A Very Strong
Investment Management* N/A Strong
Fund Liquidity* N/A Strong
Asset and Data Security Superior Strong
Information and Data Systems and Technology Superior Strong
Financial Adequacy and Stability Adequate Strong
Overall Operational Capability Assessment Superior Strong

^Key factors that are particular to the operation of AssetWatch. *Key factors that are particular to the operation of La Trobe Financial Asset Management.

Determining Operational Capability

A variety of general operational factors, including those that are specific to the operation, are reviewed by Australia Ratings to determine the strength of an operation’s capability and effectiveness in supporting an asset’s performance. These key factors include:

  1. Ownership, Performance and Outlook – shareholder support and equity strength; historical performance of the operation as well as expected future direction are considered. The support for an operation will be stronger where an operation has demonstrated strong equity support for its operations and consistent positive performance.
  2. Experience and Skill of Management and Staff – the degree of expertise, training, efficiencies, reliability and turnover of staff, with particular consideration to key management and staff are considered. The greater the experience, skill and development, the more likely the support for the operation will be strong.
  3. Governance – the structure and responsibilities of the Board are reviewed. Stronger support for the operation will emanate from a clear separation of interests and independent oversight.
  4. Risk Management and Compliance –documented policies and practices of the operation that support a minimal risk environment and a compliant environment are considered. Relevant regulatory, legal, industry and internal requirements are reviewed. The tighter the controls to minimise risk and noncompliance, the stronger the support for the operation.
  5. Asset and Data Security – policies and practices on securing the income-producing assets and relevant data are reviewed. Regularity and results of tests undertaken to determine the effectiveness of those practices are also considered. An operation’s capability will be stronger if the security proves to be effective.
  6. Information and Data Systems, and Technology – the process of collecting, storing, accessing and utilising information and data; and the effectiveness of these processes in supporting the needs of the operation are considered. Stronger support for the operation tends to come from newer electronic systems and programs and those systems and programs that communicate to and complement related system and programs effectively.
  7. Financial Adequacy and Stability – the financial profile of an operation relative to the ongoing financial needs of the assets are reviewed. The support for an operation will be stronger if the financial profile includes consistent profitability, sound capital management and very strong liquidity in the medium term.

Depending on the type of operation being assessed, adjustments are made to reflect the individual nature of an operation, including:

  • Australia Ratings determines the degree of importance of these factors for that operation to operate effectively.
  • If an operation depends greatly on one factor over another, the degree of consideration is adjusted accordingly.
  • Any other key factors that are unique to the operation are also taken into account.

The collective consideration of all the listed factors will achieve an overall assessment of the strength of an operation’s capability and it is this assessment that enables comparative exercises. Despite operations varying in type, Australia Ratings’ independent Operational Capability Assessment will facilitate the ranking of these operations in order of strength of capacity to support the performance of their relevant income-producing assets.

Find out more about Operational Capability Assessment.

Daniela Crisafi, Director, Australia Ratings 



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