Advanced Credit Risk

Day One: Basel III and Its Impact on Credit Risk

Most major banks are now compliant with the capital requirements of Basel III and have managed the impact of the liquidity, leverage and long-term funding source provisions. The 2025 delayed Revised Standardised Approach to Credit Risk will have an impact even at an advanced level, as we creep back towards the simpler approach of Basel I.

Almost all banks find their regulators refusing to allow them to model credit risk at an advanced level for regulatory capital allocation purposes. The regulatory preference is shifting towards a more broad-based standardised approach and quantitative leverage measures. This is unsurprising given that during the Banking Crisis, the once-mighty Royal Bank of Scotland Group managed to generate $2trillion of assets on a capital base of only $50bn despite having a CAR of circa 8%. 40 times the capital base was not what regulators expected! Consequently, we are in danger of moving back towards Basel 1.

This one-day advanced session examines the impact of current regulatory thinking on credit risk.

Session 1: Introduction

• Basel and its evolution

• Vickers – the separation of retail from other banking

• The Senior Managers Regime

• GSIFI’s/GSIBS and domestic SIBS

Session 2: The Basel II/III agreements

• Improving risk & asset management

• Aligning regulation and economic realities

• The technical challenges from a bank/regulator’s point of view

• How much capital is sufficient capital

• The 3-pillar regulatory structure

• Case Study/ Practical Example

Session 3: Basel III in more depth

• An overview of the new requirements

• The new minimum capital requirement

• Model Generated DDF & CCF

• Capital conservation buffer

• Countercyclical buffer

• Counterparty credit risk

• Liquidity risk management – LCR and NSFR

• Timeline and transitional arrangements

• Leverage Ratio

• Case Study/ Practical Example

Session 4: Basel & Credit Risk

• The Basel approaches to credit risk

• The risk management of credit risk

• The role of the credit committee

• The use of rating agencies

• Default risk using historical information

• Corporate credit assessment

• Company risk assessment

• Basel & model risk

• Stress testing

• Case Study/ Practical Example

Session 5:  Risk-Adjusted Performance Measurement (RAPM)

• Optimising the management of financial resources

• Economic Profit and Economic Value Added (EVA)

• Return on Capital – RAROC, RORAC and RARORAC

• The challenges of enterprise-wide implementation

• Case Study/ Practical Example

Session 6:  The Revised Standardised Approach to Credit Risk

• What is it, and when will it impact banks?

• Exposures to Banks

• Exposures to Corporates

• External Credit Risk Assessment Approach (ECRA)

• Risk weight table for bank exposures under the SCRA

• Exposures secured by real estate

• Other Retail

• Investments in equity or regulatory capital instruments issued by banks or securities firms

• Risk weight add-on for exposures with currency mismatch

• Defaulted exposures

• Credit Risk Mitigation Techniques

• Case Study/ Practical Example

Session 7: Instead of Basel IV – What Changes Are Likely

• Senior Manager's Responsibility

• Bond Bail-In

• More Ring Fencing

• Leverage/Gearing

• Hybrids as Capital

• Practical Examples

Session 8: Wrap-Up and Open Forum

Day Two: Advanced Credit Analysis – including IFRS 9

This session will enable delegates to manage and employ the tools used in credit risk & credit analysis to assess individual, sector and portfolio credit risks. It develops the understanding, implementation and employment of a comprehensive credit risk management framework to assess the critical risk factors affecting corporate borrowers.

There is a detailed description of credit risk analysis, showing how it can be managed by an organisation and exploring the key components underlying the process. Some challenging credit risk case studies and exercises are used widely to ensure the training is interactive and practical.

Introduction to Analysis

• What is Credit Analysis?

• Managing credit analysis

• Setting the objectives and goals of the credit analyst team

• Detailed approach to credit analysis, including individual, sector and portfolio risk

• Predicting, managing and trading through Credit Cycles

• Understanding and employing data derived from the probability of default, loss given default and expected loss data

• Setting the parameters for system analysis

• Case Study/ Practical Example

Session 1: Advanced Credit Analysis

• The SLOP Approach

• Balance Sheet Analysis

• Connected/Counterparty/Group/Systemic/Correlated Exposures

• P & L Analysis

• Cash flow analysis

• Budgets, projections, forecasts

• Ratio analysis

• More sophisticated credit tools

• DCF & PDV

• Case study/ Example to illustrate the above

Session 2: Assessing Refinancing Risk

• When should we refinance?

• Forfeiting

• Securitisation

• The cash flow waterfall

• Warranties, terms, conditions

• EBITDA & other key ratios

• Security

• Pricing

• Case study/ Example to illustrate the above

Session 3: Credit Enhancement Methods

• Due diligence process and enhanced credit appraisal techniques

• Credit Scoring models

• Collateral – the various forms

• Asset-Backed Lending

• Insurance Options

• Securitisation

• Case study/ Example to illustrate the above

Session 4: Creating Cash Flow Ring-Fencing Structures

• What do we mean by ring-fencing?

• What structures work best?

• Documentation requirements

• Notice of assignment

• The challenge of multi-banking

• Policing the credit risk management process – regular reviews are essential

• Escrow Accounts, Pool Accounts, Designated accounts

Session 5: Parent & Subsidiary Rating Linkage

• Ratings generally

• Parent company ratings

• Group ratings

• Subsidiary ratings

• How to link the two?

• The best or worst-case approach

• Cross, upstream and downstream guarantees

• Letters of comfort

• Case study/ Example to illustrate the above

Session 6: Sovereign Risk & Sovereign Debt

• How do we measure Sovereign debt?

• External rating agencies

• Building an internal model

• International sources

• Types of Sovereign Debt

• Unusual treatment of Treasury Bills by Basel III

• Case study/ Example to illustrate the above

Session 7: Company Valuation for Acquisition Finance & Distressed Debt Situations

• How do we value a company?

• Cash flow methods

• Profitability methods

• Balance sheet methods

• Price-earnings methods

• Valuing distressed debt

• Case study/ Example to illustrate the above

Session 8: NPLs & IFRS 9

• The existing definition of an NPL

• Provisions and interest suspense

• The impact of IFRS 9

• The whole of the loan life provisioning

• Complying with IFRS 9

• The impact of IFRS 9

• Case study/ Example to illustrate the above

Session 9: Wrap-Up and Open Forum

Day Three: Syndicated Lending

A syndicated loan is usually a large loan offered by a small syndicate or club of banks – often relationship banks. There are normally two primary drivers. First, the banks concerned feel the exposure is too big for them to accommodate alone; secondly, the client wants to spread the business around its relationship bankers so as not to mistreat one or more of them.

This session considers the importance of this type of lending to usually larger clients and the mechanics and techniques involved.

Introduction

• Overview of credit market risk definitions, credit market risk statistics and transaction timetable

• Offer documents – the term sheets and introduction to documentation

• The debt market in the context of the capital markets spectrum, with a case study

• Rating process and clarification

Session 1: Primary market Dynamics from Pre-Mandate to Mandate Award, including Pricing

• Yield and average life calculations for the loan market

• Term sheets – assessment from the borrower’s viewpoint

• Evaluating alternative debt solutions with a case study

• Pricing a new transaction: sources of information

• Yield calculations using credit risk case studies

• Case study/ Example to illustrate the above

Session 2: Credit analysis

• Assessing prime mandates

• Assessing participating mandates

• Senior versus junior participation

• Credit assessment – the theory

• Credit assessment – the practice

• Risk Reward Considerations

• Case study/ Example to illustrate the above

Session 3: Portfolio Management, Market Players, Secondary Markets

• Portfolio management

• Capital constraints – commentary and definitions relating to Basel

• Types of investors in the primary and secondary loan markets

• Market makers and characteristics of the secondary loan market

• Structures and secondary pricing

• Comparative pricing, restrictions on trading and structural complications

• Secondary pricing case study

• The documentary process – confirmations, transfers and completion of a trade

• Regulations and codes of conduct

• Case study/ Example to illustrate the above

Session 4: Evaluation Techniques to Position the Syndicated Loan Market in Debt Capital Markets

• Basic principles

• How to evaluate a specific loan

• The debt capital markets

• The banks' position in that market

• Using global or international bank partners

• Pricing considerations

• Case study/ Example to illustrate the above

Session 5: The Importance of Syndicated Loans to Clients

• Why syndicate?

• Who to syndicate with?

• The importance of syndicate partners

• Disclosed versus non-disclosed syndication

• Securitisation/Selling down – when is this possible

• Case study/ Example to illustrate the above

Session 6: Other Key Issues

• Bidding alternatives in preparing the mandate

• To dissect a term sheet from a borrower’s perspective

• To review market-clearing pricing trends

• The latest legal/documentation issues for syndicated loans

• To develop a syndicated loan transaction credit risk strategy and present a personalized syndication analysis

• To mitigate syndication risks

• Case study/ Example to illustrate the above

Session 7: Wrap-Up and Open Forum

Day Four: Project Finance

A textbook definition of Project Finance reads:

“The raising of finance on a Limited Recourse basis, for the purposes of developing a large capital-intensive infrastructure project, where the borrower is a special purpose vehicle and repayment of the financing by the borrower will be dependent on the internally generated cash flows of the project.”

This session examines the role and availability of project finance in the current marketplace. This is not a mathematical course, although we must consider projections, cash flows and balance sheet analysis to an appropriate level. Instead, we will concentrate on the main principles, including a thorough review of the roles of the different parties in the transaction, an examination of the four different phases of the project, the risks in all their various guises, the methodology behind the construction of the cashflows and the credit risk techniques deployed in their evaluation. We also examine the structure of the transaction, the legal and documentation aspects, the essential due diligence procedures and most importantly, the source of repayment.

Project Finance Overview

• Bidding alternatives in preparing the mandate

• Contrast with other forms of limited recourse financing

• The rationale for using project finance and trends

• Who is involved?

• Syndication or sole sources

• Third-party interests

• Government interests

• PPI schemes

• Case study/ Example to illustrate the above

Session 1: Project Finance Refresher

• Definitions & Principles

• Suitable Lending policies

• Suitable projects

• Syndication & Participation

• Risk/reward

• Credit Implications

• Case study/ Example to illustrate the above

Session 2: Project Costs

• Quality & Accuracy of Estimates

• What is a cost plan, preparation and limitations?

• Provisional sums, allowances & contingencies

• Dealing with exclusions

• Value engineering

• When to walk away

• Case study/ Example to illustrate the above

Session 3: Funding

• Cashflows before, after and during the completion

• Equity or quasi-equity investment

• Debt versus equity

• Co-funding & contingent agreements

• Covering funding shortfalls

• Appropriate debt structure and terms

• Managing exposure and maximising security

• Dealing with problems

Session 4: Ownership Structures

• What type of structure?

• Considerations in selecting a structure

• Project finance structures

• Special Purpose Vehicle (“SPV”)

• General and limited partnerships

• Joint Ventures

Session 5: Sources of Funding

• Options

• Types of equity and debt

• Methods of obtaining finance

• Structure of capital markets

• International issues

Session 6: Other Key Topics

• Funding sources & credit criteria

• Case studies, risk profiles and structuring protocols

• Simulate, arrange and document project financing

• Construct a project finance cash flow model

• Capitalise on the new horizons for projects and funding sources

Session 7: Wrap-Up and Open Forum

Day Five: Problem Loans & Distressed Debt Restructuring

This session is designed to hone the skills required to manage and operate a credit and loan portfolio and restructuring system that identifies winners from losers and delivers real prospects of higher recoveries. The emphasis is on the practical, as well as the theoretical, with numerous examples and case studies throughout the course as well as in-depth discussions so that delegates can pool their experiences and learn from both mistakes and successes.

Introduction: What goes wrong and how to spot and prevent it?

• The “big five” causes of debt servicing difficulties

• The importance of initial data gathering

• Early signs and how to spot them

• Systems/strategies for credit risk monitoring potential problems

• Risk/reward considerations

• Security and when to call/enforce it

• Example using an archive case, followed by debriefing and discussion.

Session 1: Introduction to loan workout, policy & restructuring

• Loan Grading

• Loan Review – Assessing the survival

• Bankruptcy/Insolvency option

• Work out strategies

• Planning the process

• Setting up procedures

• Responsibilities

• The case for legal action and how to manage it

• Example using the FGB archive case, followed by debriefing and discussion

Session 2: Reaction to Default or Imminent Default

• When is it worth intervening?

• Facing up to the situation, both the bank and the borrower

• Syndicated Loans

• Multi-banked clients

• Multi-layered relationships – several services provided

• Proportionality

• The danger of “personalising” collections

• Taking a commercial, non-emotive view

• WIIFM?

• Example using an archive case, followed by debriefing and discussion.

Session 3: Initial Steps

• Immediate action

• Liquidation versus non-liquidation

• Ditto Bank Receiver versus the client as Receiver

• Syndicated and multi-banked loans

• Excel work out models

• Options for lender & borrower

• Cost-benefit analysis and risk-reward considerations

• Systemic considerations

• Strategic, national, political or reputational issues

• Example using an archive case, followed by debriefing and discussion.

Session 4: Assessing the Prospects of Success

• Will restructuring help/work

• Creating a repayment model

• Stress testing the models

• Sensitivity analysis

• Valuation of distressed assets, including security

• Going versus gone concern analysis

• Making provisions

• Setting benchmarks

• Developing a banker's cash flow

• Example using an archive case, followed by debriefing and discussion.

Session 5: Remedial Management

• Systems, process, control, monitoring & implementation

• Evaluation, strategies, alternatives.

• Dealing with the terminally ill

• Valuing security, current, ongoing and future

• Making provisions

• Interest suspense

• Example using an archive case, followed by debriefing and discussion

Session 6: When to give up

• Basic considerations

• Risk/reward

• The dangers of personalising the process

• Signs that it is hopeless

• Public/moral duty versus cost

• Recording write-offs

• Managing write-offs

• The role of external agencies

• Example using an archived case, followed by debriefing and discussion

Session 7: Other Key Topics

• Identify what is causing borrowers' problems and provide the most appropriate and cost-effective solution

• To provide solutions unique to the sector in which the company operates

• Initial analysis: the use of liquidation models to assess each stakeholder’s economic interest

• To restructure the balance sheet of a highly leveraged company

• How the bank’s collateral performs when the borrower is in distress

Workshop Conclusion, Wrap Up & Open Forum

Training Objectives

After attending this advanced training course, delegates will be able to:

• Understand fully what credit risk means in practice, both in regulatory and practical terms

• Identify the key elements of credit risk and how they impact different lending scenarios and requirements

• Understand the key risks and how these can be managed or mitigated

• Measure, quantify and evaluate the correlation of credit risk exposures within a portfolio

• Understand the various regulatory measures of credit risk

• Appreciate the value of a high level of risk modelling and sensitisation techniques for the main drivers of credit risk

• Be able to effectively implement relevant processes, including credit portfolio management

• Understand why things go wrong and how to spot the signs

Training Course Summary

As this is an advanced training course, beginners may struggle. Ideally, at least a working knowledge of credit risk in a banking environment is required. This is a highly interactive workshop with detailed examples and case studies. Delegates are free to bring their own cases/examples to the sessions. Delegate participation will be actively encouraged.