Effective Credit Risk Management Strategies

In the context of credit risk management, a portfolio manager is evaluating several counterparties for potential credit exposure. After an exhaustive analysis, the manager identifies that one counterparty, despite having a relatively high credit rating, operates in a highly cyclical industry. Conversely, another counterparty has a lower credit rating but is involved in a non-cyclical industry with stable cash flows.

As the portfolio manager considers strategies to mitigate credit risk while maximizing potential returns, which of the following approaches would be the most effective in managing credit risk in a portfolio context?