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Corporate Credit Risk - Analysis, Modelling, Mitigation and Control

Duration: 2 days
  • Business Cycles, “Credit Crunches” and Corporate Credit Risk
  • Fundamentals of Corporate Credit Risk
  • Corporate Credit Risk Analysis
  • External Rating of Corporate Debt
  • Internal Rating Models
  • Mitigating and Controlling Corporate Credit Risk
The objective of this course is to give you a good understanding of methods and tools for analyzing, modelling mitigating and controlling corporate credit risk.

We start with general introduction to corporate credit risk and discuss the challenges of managing this type of risk – in “normal” times and under stressful market conditions as those that we have experienced in recent years.

We then take a closer look at some of the “fundamentals” of corporate credit risk. We explain the business and financial risks that may affect a corporation’s ability to meet its financial obligations, and we discuss how various credit events and credit spread changes may affect loans and investment products. We will also discuss how “structural” features such as seniority, parental support, and structural subordination affect the credit quality of various corporate debt instruments.

Further, we look at various methods for assessing corporate credit risk. We explain how a corporation’s business models, business environment and financial statements can be analyzed to determine how various economic, business and financial factors affect corporate credit quality and debt servicing ability and likelihood of default.

We also look at credit scoring, at the rating system and methodologies used by the major rating agencies such as Moody’s, Standard and Poor’s and Fitch, and at the “internal rating models” used by banks under the Basel IRB approach. First, we give an in-depth explanation of how to build, calibrate and implement the internal rating system. Then, we look at how the risk components such as “Probability of Default” (PD) and “Loss Given Default” (LGD) are calculated.

Finally, we give a thorough explanation of method and instruments for mitigating corporate credit risk. Topics will include the use of loan covenants, margining and collateral. We also explain and demonstrate how credit risk can be transferred, wholly or partly, using credit derivatives, asset securitization and other structured finance transactions.

Day One

09.00 - 09.15 Welcome and Introduction

09.15 - 12.00 Corporate Credit Risk – General Introduction

  • Business Cycles, “Credit Crunches” and Corporate Credit Risk
  • Historical and Current Default Rates
  • Case Studies: Enron, WorldCom, GM, …

Fundamentals of Corporate Credit Risk

  • The Nature of Credit Risk
    • Types of credit events (bankruptcy, default, failure to pay, etc.)
    • The bankruptcy process
    • Credit quality deterioration and migration risk
  • Intrinsic Credit Risks in Corporate Business
    • Risks arising from corporate business strategy
    • Risks arising from corporate financing policy
  • The Anatomy of Corporate Credit Risk
    • Loans, bonds and other “on-balance” liabilities
    • Senior, junior and subordinated debt
    • Contingent/off-balance exposures
  • Basic Principles of Corporate Credit Risk Assessment
  • Examples and Small Exercises

12.00 - 13.00 Lunch

13.00 - 16.30 Corporate Credit Risk Analysis

  • Financial Strategy, Performance and Earnings Dynamics
    • Understanding corporate finance strategy (treasury objectives)
    • Ratios for earnings/profitability
    • Financial performance (linking to share price of the company)
  • Analysis of Stability and Financial “Health”
    • Overview of financial statement analysis
    • Financial shenanigans and other tricks
  • Financial Flexibility and Liquidity
    • Operational and nonoperational flexibility
    • Liquidity risks and ratios, sources of liquidity
    • Cash flow GAP analysis (financing gap)
    • Refinancing risk (prepayment, maturing debt)
  • Cash Flow, Solvency and Debt Capability
    • Analyzing the cash flow statement and cash flow ratios
    • Measuring free cash flow and debt capacity
    • Defining and evaluating solvency
  • Analysis of Non-Financial Factors
    • Macro factors, business strategy, sector drivers (Porter Model)
    • Evaluating management and ownership structure

Day Two

09.00 - 09.15 Brief recap

09.15 - 12.00 External Rating of Corporate Debt

  • Rating Institutions and their Importance
  • Rating Methodologies
  • Primary and Secondary Credit Factors
  • The Rating Process
  • Types of Ratings and their Interpretations
  • Issuer vs. Issue Ratings
  • Measuring Rating Performance

Internal Rating Models

  • Requirements under Basel
  • Building, Calibrating and Implementing an Internal Rating System
  • Calculating Probabilities of Default
    • Statistical default prediction methods
    • Benchmarking and migration of PDs
  • Calculating Losses Given Default
    • Requirements
    • The problem with Basel’s “backward-looking” LGD
    • Small exercise
  • Examples and Small Exercises

12.00 - 13.00 Lunch

13.00 - 16.00 Internal Rating Models – continued

  • Validating Internal Rating Systems
  • Using Outputs from Internal Ratings System to Calculate Regulatory and Economic Capital
  • Case Study and Exercises

Mitigating and Controlling Corporate Credit Risk

  • Overview of Methods for Managing Credit Risk
  • Mitigating Credit Risk through Financial Covenants
    • Affirmative covenants
    • Negative covenants
    • Financial covenants
  • Using Collateral and Margining
  • Credit Risk Transfer and Asset-Backed Financing
    • Credit guarantees
    • Credit derivatives
    • Securitization and Project Finance
  • Reporting and Management Control

Evaluation and Termination of the Seminar