Corporate Credit Risk - Analysis, Modelling, Mitigation and Control

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
  • Corporate Credit Risk in Low-Yield and Low-Spread Environments
  • Case Studies: Enron, WorldCom, GM, Lehman...

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
  • Examples and Small Exercises

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 III
  • 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 - 16.30 Internal Rating Models – continued

  • Validating Internal Rating Systems
  • Using Outputs from Internal Ratings System to Calculate Regulatory and Economic Capital
  • Stress Testing Credit Risk Capital Using Macroeconomic Scenarios
  • Case Study and Exercises

Mitigating and Controlling Corporate Credit Risk

  • Overview of Methods for Managing Credit Risk
  • Mitigating Credit Risk through Financial Covenants
    • Affirmative and 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

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