Corporate Credit Portfolio Management
Prior to the credit crisis there was an increased emphasis on quantification of credit risk both by regulators and by banks using their own internal models. Some fundamental credit risk indicators were given insufficient attention. The global credit crisis has highlighted some weaknesses in the assessment of credit risks, and in the approach to credit portfolio risk evaluation and management. This has resulted in regulators re – evaluating how risk should be measured and how much Capital is needed to support those risks, as well as the composition of Capital.
The course will consist of a structured review of the key risks that impact corporate credit risk exposures, how they can be managed and approaches to reflect the risks in a risk measurement system.
Earlier sessions in the course will focus on the tools of credit risk measurement, with later sessions reviewing the scope for managing risk.
Participants will be presented with a sample “generic” corporate credit portfolio that will be developed throughout the programme in light of the participants’ perception of risk and return objectives, with exercises covering issues such as
• Key financial indicators of corporate credit risk
• Sensitising default and recovery rates – stress testing the credit portfolio and scenario analysis
• Assessing the impact of changes in credit pricing on RAROC
In addition to the use of a generic financial model throughout the course, key issues to be covered in the training programme will also be illustrated by a review of extracts from selected banks’ financial statements and a bond fund.
To obtain maximum benefit from this programme participants should already:
• Have a solid understanding of the core principles of corporate credit analysis, including secured financings
• Be familiar with the main functions of Excel
• Understand the main statistical techniques (such as mean, median, standard deviation, the main statistical distribution types, correlation)
As this programme will focus on reviewing the main principles of a credit portfolio model the programme does not require participants to build a model.
Who should attend?
This programme is intended for personnel who would benefit from developing their skills in assessing corporate credit risk on a portfolio basis, such as
Participant Potential Benefit
Experienced Corporate Credit analysts Develop understanding of credit portfolio risk techniques rather than focusing on analysing specific transactions
Credit Risk Managers review of key issues in a credit portfolio measurement model, and an intensive overview of some of the techniques for managing credit risk
Structured finance professionals involved in securitisation to enhance understanding of structuring and risk and return issues in CLO transactions comprised of corporate credit risks
Fixed income portfolio managers to increase participants’ awareness of risk and return issues on a portfolio rather than on a transactional basis
Experienced corporate relationship managers to increase participants’ awareness of how portfolio credit risk can be measured and risk and return issues
• Key components of a sound credit risk management system – qualitative and quantitative issues; internal corporate governance considerations and monitoring the credit portfolio
• The major influences on corporate credit risk – what needs to be measured and how?
• Lessons from the credit crisis – why did credit risk models underestimate the extent of the crisis?
• Causes for past banking failures – lessons learned in terms of key areas of risk – analysing fundamental drivers of credit risk vs. excessive attention to “technical aspects of modelling”
• The reaction of regulators - proposals from the Banking regulators; summary of key recommendations for Basle 3; some results from selected regulators stress tests
• The tools for assessing corporate credit risk – qualitative, quantitative and market indicators – dangers of over-reliance on historic quantitative measures
• Review of the Capital and Risk Management Pillar 3 disclosure statement for a major bank to illustrate key issues in credit portfolio analysis and management, including expected vs. actual performance
Exercise: Participants are assigned to groups and develop a framework for a potential risk measurement model including weightings for the various key aspects of risk
Measuring risk in a credit portfolio: assessing Expected Default Frequencies (EDF)
• Exercise: Intensive refresher on some of the key statistical concepts
• Assessing incremental risk exposures for a specific transaction
• Historic corporate default rates based on Rating Agency statistics
• Single and multi-year transition rates (probability of upgrade or downgrade to another rating over time) and interpretation
• The principles of some differing approaches to risk measurement for corporate credit exposures - A and Z scores; Credit scorecards; Credit Metrics; KMV; Credit risk +
• Portfolio diversification – theory of diversification and concentration risks vs. lessons from past banking failures
Exercise / discussion: illustration of some of the key drivers in various credit risk models
Case Study: assessing unsecured credit risks in a sample portfolio
Exercise: Participants review a sample portfolio based on assigned ratings for the unsecured risk of the various obligors
• Review of the exercise based on the anticipated default frequency of the portfolio
Mitigating the risk in a credit portfolio; review of potential Losses Given Default (LGD)
• The value and limitation of differing types of risk mitigants for corporate credit facilities – covenants and third party credit support
• Security : differing forms of security and potential impact on risk ratings
• Rating Agency data on recovery rates following defaults
Exercise: Participants refine their rating model based on their assessment of the value of any risk mitigants
Risk and return
• What is a proper rate of return?
• Traditional measures of profitability such as ROA and ROE vs. return on regulatory capital and economic profit and Credit VAR
• How much capital is needed to support the portfolio? Review of the principles of Capital Adequacy, and regulators’ proposals following the credit crisis
• Use of benchmarks to evaluate returns on a corporate credit portfolio – credit pricing in the bond markets as an indicator of investors’ expectations; principles of the Cost of Capital
Exercise: Participants review the sample credit portfolio and assess the likely return on key performance measures under a variety of assumptions
Enhancing returns through active credit management – secondary loan market and securitisation
• Use of the secondary loan market
• Principles of securitisation – can securitisation be used as a risk transfer tool in current market conditions?
• Review of a CLO transaction to illustrate the different classes of debt, risk factors that have influenced the structure; and pricing
Exercise: Participants consider how they wish to manage a credit portfolio and potential impact on portfolio returns
• Review of exercise
Enhancing returns through active credit management – credit derivatives
• Principles of credit derivatives and the relationship to its cash market equivalent – are credit derivatives giving a different view of credit pricing from cash credit products?
Exercise: Participants are given background information on credit derivative pricing and decide on a strategy for the use of credit derivatives as part of credit portfolio management
Reviewing the credit portfolio
• Participants make a final proposal for a sample credit portfolio reflecting
• Expected Default Frequencies
• Expected Losses
• Use of credit management techniques such as securitisation
Course summary and review
As every course we run is tailored to meet the specific needs of each client, we can only provide an estimate after fully understanding your specific requirements. Please complete the form below of call +44 (0) 208 894 4977 to discuss how Taylor Associates can help you.