How does Petro Stopping Center mitigate the derivative counterparty's credit risk?
Petro_Stopping_Center Franchise · 2025 FDDAnswer from 2025 FDD Document
element of the Company's finance debt that is contractually floating rate or has been swapped to floating rates. If the interest rates applicable to these floating rate instruments were to have changed by one percentage point on January 1, 2025, it is estimated that the Company's finance costs for 2025 would increase by approximately $30 million (2023 $30 million).
(b) Credit risk
Credit risk is the risk that a customer or counterparty to a financial instrument will fail to perform or fail to pay amounts due causing financial loss to the Company and arises from cash and cash equivalents, derivative financial instruments and deposits with financial institutions and principally from credit exposures to customers relating to outstanding receivables. Credit exposure also exists in relation to guarantees issued by the Company under which the outstanding exposure incremental to that recognized on the balance sheet at December 31, 2024 were $480 million (2023 $473 million) in respect to guarantees of borrowings. Of this amount, $317 million (2023 $371 million) of third party guarantees relates to guarantees of borrowings. There is no liability recorded at December 31, 2024 in relation to these guarantees (2023 $0). For all guarantees, maturity dates vary, and the guarantees will terminate on payment and/or cancellation of the obligation. In general, a payment under the guarantee contract would be triggered by failure of the guaranteed party to fulfil its obligation covered by the guarantee (being the earliest period the guarantee can be called).
The Company has a credit policy, approved by the CFO that is designed to ensure that consistent processes are in place throughout the Company to measure and control credit risk. Credit risk is considered as part of the risk-reward balance of doing business. On entering into any business contract the extent to which the arrangement exposes the Company to credit risk is considered. Key requirements of the policy include segregation of credit approval authorities from any sales, marketing or trading teams authorized to incur credit risk; the establishment of credit systems and processes to ensure that all counterparty exposure is rated and that all counterparty exposure and limits can be monitored and reported; and the timely identification and reporting of any non-approved credit exposures and credit losses. While each business is responsible for its own credit risk management and reporting consistent with the Company's policy, treasury holds Company-wide credit risk authority and oversight responsibility for exposure to banks and financial institutions.
For the purposes of financial reporting the Company calculates expected loss allowances based on the maximum contractual period over which the Company is exposed to credit risk. Lifetime expected credit losses are recognized for trade receivables and the credit risk associated with the significant majority of financial assets measured at amortized cost is considered to be low. Since the tenor of substantially all of the Company's in-scope financial assets is less than 12 months there is no significant difference between the measurement of 12-month and lifetime expected credit losses. Expected loss allowances for financial guarantee contracts are typically lower than their fair value less, where appropriate, amortization. Financial assets are considered to be credit-impaired when there is reasonable and supportable evidence that one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred.
Source: Item 14 — Other investments (FDD pages 131–208)
What This Means (2025 FDD)
According to Petro Stopping Center's 2025 Franchise Disclosure Document, the company addresses credit risk through a comprehensive credit policy approved by the CFO. This policy aims to ensure consistent processes for measuring and controlling credit risk throughout the company. Credit risk is evaluated as part of the risk-reward assessment when entering any business contract.
Key components of the credit policy include segregating credit approval authorities from sales, marketing, or trading teams that are authorized to incur credit risk. The policy also establishes credit systems and processes to rate all counterparty exposure and monitor and report all counterparty exposure and limits. Additionally, the policy mandates the timely identification and reporting of any non-approved credit exposures and credit losses.
While each business unit is responsible for its own credit risk management and reporting, consistent with the company's policy, the treasury department holds company-wide credit risk authority and oversight responsibility for exposure to banks and financial institutions. The company also uses letters of credit (LCs) facilities to mitigate credit and non-performance risk. As of December 31, 2024, Petro Stopping Center had committed LC facilities totaling $5,350 million, allowing LCs to be issued for a maximum 24-month duration. These facilities are held with 10 international banks.
Furthermore, in certain circumstances, the supplier has the option to request accelerated payment from the LC provider to further reduce their exposure. Petro Stopping Center's payments are made to the provider of the LC rather than the supplier according to the original contractual payment terms. At December 31, 2024, a portion of the company's trade payables which were subject to the LC arrangements were payable to LC providers, with no material exposure to any individual provider.