Corporate Credit Risk - Analysis, Modelling, Mitigation and Control

Tuesday, November 2

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

Wednesday, November 3

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 II
• Building, Calibrating and Implementing and 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