ADT 2001 Annual Report Download - page 39

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COMMODITY PRICE SENSITIVITY
The table below provides information about Tyco Industrial’s financial instruments that are sensitive to changes in commodity
prices. Total contract dollar amounts and notional quantity amounts are presented for forward commodity contracts.
Contract amounts are used to calculate the contractual payments quantity of the commodity to be exchanged under the
contracts.
FISCAL FISCAL FISCAL FISCAL FISCAL FAIR
($ IN MILLIONS) 2002 2003 2004 2005 2006 THEREAFTER TOTAL VALUE
FORWARD CONTRACTS:
Copper
Contract amount (US$) 28.3 4.3 ———— 32.6 (5.9)
Contract quantity (in 000 metric tons) 15.9 2.4 ———— 18.3
Gold
Contract amount (US$) 4.8 ————— 4.8 0.2
Contract quantity (in 000 ounces) 17.0 ————— 17.0
Silver
Contract amount (US$) 5.1 0.3 ———— 5.4 —
Contract quantity (in 000 ounces) 1,100.0 80.0 ———— 1,180.0
Zinc
Contract amount (US$) 3.9 1.4 ———— 5.3 (1.1)
Contract quantity (in 000 metric tons) 3.7 1.4 ———— 5.1
EQUIPMENT/RESIDUAL RISK MANAGEMENT
Tyco Capital has developed systems, processes and expertise to
manage the equipment and residual risk in its commercial busi-
nesses. The Tyco Capital process consists of the following:
(i) residual setting and valuation at deal inception, (ii) system-
atic residual reviews, and (iii) monitoring of residual realiza-
tions. Reviews for impairment are performed at least annually.
Residual realizations, by business unit and product, are
reviewed as part of Tyco Capital’s ongoing financial and asset
quality review, both within the business units and by corporate
management.
COMMERCIAL
Tyco Capital has developed systems specifically designed to
effectively manage credit risk in its commercial businesses. The
process starts with the initial evaluation of credit risk and
underlying collateral at the time of origination and continues
over the life of the finance receivable or operating lease,
including collecting past due balances and liquidating underly-
ing collateral.
CONSUMER AND SMALL-TICKET LEASING
Tyco Capital has developed proprietary automated credit scoring
models by loan type that include both customer demographics
and credit bureau characteristics. The profiles emphasize,
among other things, occupancy status, length of residence,
length of employment, debt to income ratio (ratio of total
installment debt and housing expenses to gross monthly
income), bank account references, credit bureau information
and combined loan to value ratio. The models are used to assess
a potential borrower’s credit standing and repayment ability
considering the value or adequacy of property offered as collat-
eral. Tyco Capital’s credit criteria include reliance on credit
TYCO CAPITAL RISK MANAGEMENT
Tyco Capital’s business activities contain various elements of
risk. Tyco Capital considers the principal types of risk to be
credit risk (including credit, collateral and equipment risk) and
market risk (including interest rate, foreign currency and liq-
uidity risk).
CREDIT RISK MANAGEMENT
Tyco Capital has developed and maintains systems specifically
designed to manage credit risk in each of its business segments.
Tyco Capital evaluates financing and leasing assets for credit
and collateral risk during the credit granting process and peri-
odically after the advancement of funds.
Each of Tyco Capital’s strategic business units has devel-
oped and maintains a formal credit management process in
accordance with formal uniform guidelines established by Tyco
Capital’s corporate credit risk management group. These guide-
lines set forth risk acceptance criteria for:
• acceptable maximum credit line;
• selected target markets and products;
• creditworthiness of borrowers, including credit history, finan-
cial condition, adequacy of cash flow and quality of manage-
ment; and
• the type and value of underlying collateral and guarantees
(including recourse from dealers and manufacturers).
Tyco Capital also employs a risk adjusted pricing process
where the perceived credit risk is a factor in determining the
interest rate and/or fees charged for its financing and leasing
products. As economic and market conditions change, credit
risk management practices are reviewed and modified, if neces-
sary, to seek to minimize the risk of credit loss.