Reference no: EM131884987
Assignment
Case Study: Heller Financial
Heller Financial is a commercial finance company with a market capitalization of more than $2 billion. At year-end 1998, Heller had over $14 billion in assets and net income reached a record $193 million. Heller's vision is to become the leading provider of specialized financing solutions to mid-sized and small businesses in the United States and select international markets.
On May 1, 1998, Heller Financial returned to the New York Stock Exchange and the ranks of public companies. Previously wholly owned by Fuji Bank, more than 42 percent of the company's stock was released in the initial public offering (IPO), generating more than $1 billion. The IPO raised the bar of competition; Heller must now not only compete for customers against its peers in the commercial finance industry, but also compete for investors' money against the broad spectrum of public companies. Chief Financial Officer Lauralee Martin explains:
The stakes are higher. The benchmarks of performance are not just your own standards; the benchmarks are set against all others. Tougher competition naturally raises you to a higher level of performance.
The market's mandate is clear: maximize shareholder value by achieving exceptional risk-adjusted returns on investors' capital.
Heller's financial goals after this IPO are to:
? Consistently increase return on equity (ROE) to at least 15 percent
? Raise its credit ratings to mid-to-high single A
? Grow earnings in excess of 15 percent each year by growing revenues, improving margins, increasing operating efficiency, and maintaining credit excellence
? Maintain a strong financial position based on solid credit discipline, prudent risk management, and a balanced and well-diversified funding strategy
Superior risk management is key to achieving each of these objectives. To increase return on equity to 15 percent requires efficient capital allocation. To raise credit ratings requires effective overall risk management. To increase operating efficiency while maintaining credit excellence requires solid understanding and management of operational risks.
Changes Within the Organization
Proactive focus on risk management is critical given the amount of change occurring within Heller's organization. During 1998, Heller consolidated its domestic operations around five core businesses: Corporate Finance, Commercial Services, Leasing Services, Real Estate Finance, and Small Business Finance. In addition, the Project BEST initiative restructured each of Heller's businesses to streamline processes, eliminating redundancies and reducing the workforce by 15 percent. Heller also acquired approximately $625 million in domestic and international assets associated with the technology-leasing business of Dana Commercial Credit Corporation. Through 1999, Heller continued to reorganize. Leasing Services has been broken out into Global Vendor Finance, Capital Finance, and Commercial Equipment Finance business groups. The Commercial Services business has been sold. The Healthcare Finance group has been acquired. Expansion into new international markets and integration of the acquired Dana Commercial Credit Corporation into the Global Vendor Finance group continues, widening the range of vendor leasing products Heller offers to customers and prospects.
In July of 1999, the Chief Credit Officer, Mike Litwin, circulated a memorandum calling for Heller to change its risk management approach in response to this environment of increased risk. Litwin summarized:
The reality is that whenever an institution is in the process of change or is developing new activities, it runs into much higher operational risks than does a stable or existing business. A comprehensive and proactive focused enterprise risk management function must be in place to address the risks attributable to mergers, implementation of new systems and reengineering of processes, launch of new products or entry into new markets and the acquisition of new staff and client relationships. In addition, I believe the entire organization is under stress as a result of Project BEST initiatives as well as the pressures of being a public company.
This memorandum served as the catalyst for adopting a new approach to risk. In September of 1999, Heller Financial embarked on an enterprise risk management (ERM) initiative to redefine its risk management vision, with a particular focus on management of operational risks.
ERM and Operational Risk Management
Senior management sponsors of the ERM initiative believed that managers and business leaders across the organization also saw the need for better risk/return management, but this belief had to be confirmed. Heller therefore conducted a thorough assessment of its current risk management practices as a first step in the ERM project. This process included:
? An internal survey of 38 members of the Leadership and Credit Councils regarding their overall attitudes toward risk/return issues
? More than 35 one-on-one interviews with senior managers to discuss the company's current state and future direction
? Internal studies and benchmarking analysis of the company's current risk management practices (risk management organizational structure, policies, analytics, and reporting)
The assessment confirmed two key things. First, that there is strong management support for the ERM initiative. Second, that the key gap in Heller's risk management included operational risk management and the integration of various risk management activities into an overall ERM framework.
Heller's Evolving Risk Profile
The changing nature of Heller's business calls for commensurate changes in Heller's approach to risk management. The structural change in the commercial finance industry from a buy-and-hold model to an originate-and-distribute model has shifted the risk profile of Heller's assets from traditional credit risks to integrated market-credit risk hybrids. The shift in Heller's businesses from transaction-oriented to more flow processes, such as small business lending and small-ticket leasing, also changes Heller's risk profile, creating the need for increased attention to operational risks.
Heller has always had a strong credit culture; the time has now come for Heller to integrate market risk and operational risk into its credit culture to develop a culture embodying the principles of enterprise risk management. While the current credit risk management process has produced superior asset selection, liquidity, concentration, and diversification, it cannot be used to manage losses due to human error or system failure. Chief Credit Officer Mike Litwin argues:
It is my view that at the present time we do not have significant credit risk issues in our company ... the risks we should be focusing on and the ones that have potential to significantly impact our financial performance and market credibility are not limited to Credit and Market Risks, but must include ... Operational Risks. Ultimately many of these non-credit risks could manifest themselves as write-offs, however, we're deluding ourselves if we think these are credit issues that can be appropriately addressed in the credit process. We will be attempting to address the "effect" rather than the "cause" of the problem.
In order to become best in class in the commercial finance industry and achieve superior risk-adjusted returns on capital relative to the market, Heller needs to incorporate a more sophisticated understanding of risk-return tradeoffs in its decision-making and become the best manager of risk in its class. An ERM approach is needed to go beyond management of credit risk to full enterprise-wide risk-return optimization. ERM looks at the risks Heller faces holistically, rather than separately addressing market, credit, and operational risk. The risks that Heller faces do not always lend themselves to easy categorization. Market and credit risks are inter-related; operational risks often manifest as credit losses. ERM integrates management of market, credit, and operational risk to ensure that risks that overlap categories are fully understood, taking into account all interdependencies among market, credit, and operational risks, and to ensure that all risks are addressed.
Objectives of ERM
The objective for the ERM initiative is both to protect the company against downside risks and to improve business performance through an integrated view of risk and return. The ERM approach will help management identify and grow businesses with the highest risk-adjusted returns and thus maximize shareholder value. The goals of Heller's ERM initiative are to:
1. Create an enterprise-wide awareness of the importance of risk management for the company.
2. Create comprehensive, enterprise-wide reporting of risk-credit, market, and operational
3. Reduce long-term writeoffs
4. Enhance credibility with external stakeholders and potentially reduce Heller's cost of funds
5. Increase Heller's market capitalization
Organizational Changes
A Chief Credit and Risk Officer (CRO) position was created (Mike Litwin became the CRO), with overall responsibility for management of all types of risk. The CRO will be responsible for strategically managing the credit, market, and operational risks of the organization and will centralize the reporting and management of all the risks Heller faces in one position. An Operational Risk Officer (ORO) position will also be created, with centralized responsibility for measurement, monitoring, and management of operational risks. This new position will enable Heller to implement a consistent operational risk management approach across all aspects of its business, provide an overall view of operational risk, and share operational risk management best practices and lessons learned across business groups.
Components of the ERM Project
The initial phase of the ERM initiative was completed in late 1999. There were substantial achievements during this first phase, which included the following:
? An ERM assessment was conducted to obtain a better understanding of Heller's risk management practices, as discussed in previous sections.
? A benchmarking study across all risk types for several dimensions of risk management practices was completed, and Heller's current state was benchmarked against other financial institutions' practices.
? An ERM framework document has been developed. It addresses the three main components for ERM-risk awareness, risk management, and risk measurement and puts risk terminology in a common language.
? Heller's vision for ERM has been defined and articulated with senior management.
? A detailed implementation plan for achieving Heller's long-term ERM vision has been developed. It also contains specific interim milestones to benchmark the company's progress.
? A framework for operational risk management and a standard operational risk report template have been developed that can be applied consistently across all business units and support services. The framework was piloted at two business units: Small Business Finance and Global Vendor Finance.
? An enterprise risk report template has been developed.
? An economic capital proof-of-concept exercise was conducted.
Implementation Phase
The implementation phase for Heller's ERM program addressed the following key challenges:
? Organizational realignment: the ERM and operational risk management objectives will be integrated into incentive compensation, roles and responsibilities, policies and procedures, and training programs.
? Enterprise risk reporting: the data environment needs to be improved to capture and aggregate information for the enterprise risk report and operational risk report.
? Implementation of operational risk management methodology: the new Operational Risk Officer will be working with the rest of the business groups and support services over the next year to apply the new operational risk management framework and begin producing the new standard operational risk report.
ERM is like a journey, which will require the organization's commitment to fully reach all of its goals. There are, however, some quick wins that require relatively fewer resources, which Heller should pursue in the near term. With the right up-front preparation and a clear road map for heading forward, Heller will realize substantial successes and benefits, as other organizations have experienced on their similar journeys.
Post Note
On July 30, 2001, GE Capital announced that it was acquiring Heller Financial for $5.3 billion in a cash transaction, or $53.75 per share (a 48 percent premium over the pre-announcement price of $35.90). In its press announcement, GE Capital noted Heller's risk management capabilities as one of the company's key assets.
APA Format
12 Point Font Times New Roman
6 Pages, not including cover page and references
Need 3 References plus the article that's posted below
Focus on Heller Financial and answer all the questions below!!!
Submit a 6-page descriptive case study utilizing the case study Heller Financial the text book, pages 262-270; and at least two academic or peer-reviewed sources. The title and references pages do not count towards the page count.
Abstract
Introduction, then answer the questions. Please use a header per question!!
1. Give an overview of the case
2. differentiate between the risk management applications and business applications used.
3. Compare and contrast the utility of business applications.
4. Determine possible solutions to credit, management, or operational problems based on case analysis.
Conclusion.