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Risk Solutions Risk Solutions Presentation Transcript

  • Risk Solutions Project Finance: Credit Assessment Templates Default and Recovery Study October 18, 2007 New York Webinar CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. Copyright (c) 2007 Standard & Poor’s, a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved.
  • Agenda • Risk Solutions Overview • Project Finance Credit Assessment Templates • Default and Recovery Study • Questions and Answers • Contacts CONFIDENTIAL AND PROPRIETARY. 2. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  • Risk Solutions Overview CONFIDENTIAL AND PROPRIETARY. 3. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  • Standard & Poor’s Risk Solutions Who we are… • Standard & Poor’s Risk Solutions is a global leader in risk management. We provide services, analytics, software, and data to help clients: – Identify, measure and manage risk; – Improve financial performance; – Gain competitive advantage; – Facilitate and manage change; – Train and educate staff. • Risk Solutions leverages S&P’s 140 years of expertise in assessing credit risk and combines it with real world experience to assist institutions in managing their credit activities with confidence. CONFIDENTIAL AND PROPRIETARY. 4. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  • Standard & Poor’s Risk Solutions What do we offer… • Services – Custom Modeling – Rating Scale Services – Expert Judgment or Qualitative Credit Assessment – Validation – Stress Testing • Products – Quantitative Models: Probability of Default, Rating Estimation and LGD Models – Portfolio Risk Management – Risk Management Platform • Data – Corporate and Structured Finance Default and Ratings Data, Recovery Data, and Data Consortia CONFIDENTIAL AND PROPRIETARY. 5. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  • Standard & Poor’s Risk Solutions What do we offer – Asset Class Coverage… Small to Financial Public Specialized Corporates Funds Medium Retail Institutions Finance Enterprises - Project Finance - Airlines - Commercial Banks - Municipalities - Mutual Funds - Small Businesses - Credit Cards - Leveraged Finance - Automotive - Insurance Companies - States - Hedge Funds - Private Firms - Mortgages - Commercial - Chemicals - Broker / Dealer - Public Enterprise - Professional Services - High Net Worth - Consumer Products - Finance Companies - Infrastructure Firms Individuals - Real Estate - Metals and Mining - Telecommunications - Oil & Gas - Utilities CONFIDENTIAL AND PROPRIETARY. 6. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  • Standard &Poor’s Risk Solutions – Corporate Structure • Confidential information is “firewalled” between Risk Solutions and all other areas of Standard & Poor’s (e.g., Ratings Group). Risk Solutions is a “non-Ratings” business of Standard & Poor’s. Standard & Poor's Credit Market Services Risk Structured Corp. & Solutions Finance Govt. Ratings Ratings CONFIDENTIAL AND PROPRIETARY. 7. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  • Project Finance Credit Assessment Templates CONFIDENTIAL AND PROPRIETARY. 8. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  • Credit Assessment Templates • Formalization of an expert-based judgment system for the assessment of obligor risk of default in hard to rate sectors. • Based on Standard & Poor’s credit ratings methodology • Includes both quantitative and qualitative factors and associated weightings • Produces a numerical score which can be mapped to S&P rating scale, internal financial institution rating scale, or a PD • Contains varying degrees of detail, based on the complexity of the specific sector and client needs CONFIDENTIAL AND PROPRIETARY. 9. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  • Project Finance Template – Summary Page CONFIDENTIAL AND PROPRIETARY. 10. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  • Template Development Process Asset Class / Industry Segment Identification Credit Factor Selection General / Sector Specific Mapping Score to Internal / Standard & Poor’s Scale Quantification / Scoring of All Credit Factors Documentation Weight Assignment and To All Credit Factors Training Iterative Material Process Preparation Calibration and Testing Factor, Weighting and Calibration Finalized Training and Implementation CONFIDENTIAL AND PROPRIETARY. 11. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  • Sample Clients • Investment Banks • Commercial Banks • Finance Companies • Insurance Companies • Asset Managers • Industrial Corporations CONFIDENTIAL AND PROPRIETARY. 12. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  • Why Templates for Project Finance? • Purely quantitative approaches for measuring risk based on a limited set of financial metrics, such as regression and static cash flow models are not effective for assessing highly complex project financings. • Quantitative measures of debt capacity or debt-service protection must be assessed in the context of the underlying project economics, structural provisions and contractual protections. • This makes it challenging for credit analysts to interpret and score qualitative risk factors in an objective manner and to apply ratings criteria consistently. CONFIDENTIAL AND PROPRIETARY. 13. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  • Project Finance Templates Levels of project finance analysis Templates mimic the S&P Ratings Process, taking a Project Summary bottom-up approach: Bank Master S&P Scale Scale Market Protection and Revenue Contracts 5.0 Credit Enhancements Competitive Market Position 5.0 Market Risk Exposure 5.0 1.5 Force Majeure Financial Strength Technology, Construction & Operations 5.0 5.0 1 1 Legal & Finance Structure 5.0 1 Project Level Score (1-10) 5.0 Institutional Risk Implied Project Rating 5.0 BBB 4 Country Risk Cap 2.0 Implied Project Rating after Country Risk 5.0 BBB 4 Sovereign Risk Force Majeure Adjustment (notches) Initial Project Rating 5.0 BBB 4 Project Level Risks Credit Enhancements (notches) 1.0 Final Project Rating 4.5 BBB+ 4+ CONFIDENTIAL AND PROPRIETARY. 14. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  • Project Finance Templates Example: scoring guidelines for qualitative factors “Supply Contracts” Project has good long-term supply contracts, but does not fully protect lenders from market risk, inflation or FX risk. AND Supply contracts are not fully integrated with revenue contracts and/or transportation and storage arrangements. Mismatches exist but are unlikely to stress debt servicing. Project assumes some responsibility for supply logistics. AND 5 Supply contracts include provisions that partially protect project from input quality variability. AND Supply interruptability provisions and casualty insurance policies are in place, but debt service is not fully covered under interruption payments and force majeure events. AND If needed, adequate internationally accepted dispute-resolution mechanisms are in place. CONFIDENTIAL AND PROPRIETARY. 15. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  • Project Finance Templates Example: financial benchmarks* min DSCR Score >2.50 times 1 2.00-2.50 times 2 1.67-2.00 times 3.5 1.43-1.67 times 5 1.33-1.43 times 5.5 1.25-1.33 times 6.5 1.18-1.25 times 8 1.10-1.18 times 9 <1.10 times 10 * These benchmarks are for illustrative purposes only. CONFIDENTIAL AND PROPRIETARY. 16. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  • Project Finance Templates Example: rating scales CONFIDENTIAL AND PROPRIETARY. 17. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  • Project Finance Templates • Performance Results – The templates have been tested against ratings (public and credit estimates). – Results achieved: 254 projects tested Exact hit = 80% Within +/- 1 notch = 19% Within +/- 2 notches = 1% CONFIDENTIAL AND PROPRIETARY. 18. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  • Project Finance Templates Our Suite of Templates Includes: – Generic Template – Industry specific sub-templates Power and Energy Infrastructure Public/Private Partnerships Natural resources (Mining, Oil & Gas) Pipelines Real Estate Telecommunications Aircraft and Ships CONFIDENTIAL AND PROPRIETARY. 19. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  • Deliverables • Scoring Spreadsheet • User Guide • Training Workshops • Credit Estimates for Performance Testing (optional) • Documentation on Model Development • Ongoing Support and Maintenance CONFIDENTIAL AND PROPRIETARY. 20. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  • Loss Given Default – Selection of Methodology • Characteristics of asset classes that lend themselves to expert based Loss Given Default assessments: – They tend to be highly heterogeneous in credit-risk nature. – Low default frequency – Volatile default frequency over time – Many exposures are to firms, projects or transactions in sectors that have undergone – or are undergoing – radical change. – Exposures are of significant size, and therefore LGD can be large in monetary terms – Empirical experience is insufficient for the development of an experience-based quantitative approach. • Project Finance and other specialized lending are typical asset types suitable to this approach. CONFIDENTIAL AND PROPRIETARY. 21. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  • Credit Assessment Template for Loss Given Default Model Based on Economic Value • LGD Templates deliver a grade where every grade is assigned a recovery range Grade Recovery Range 1+ 100% of Principal 1 90 - 100% of Principal 2 70 - 90% of Principal 3 50 - 70% of Principal 4 30 - 50% of Principal 5 10 - 30% of Principal 6 0 - 10% of Principal CONFIDENTIAL AND PROPRIETARY. 22. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  • Credit Assessment Template for Loss Given Default • Customized decision support tool • Based on Standard & Poor’s recovery ratings methodology, but incorporating the client’s own loss experience if available • The LGD framework commences with the probability distribution of the value attributable to those assets that represent possible sources of repayment – whether secured or unsecured – to lenders. • Within this LGD framework all the assets of the borrower – and not solely those representing the primary collateral to the lender – are evaluated • The methodology examines the tail of this (asset value) distribution in the region where default has occurred. CONFIDENTIAL AND PROPRIETARY. 23. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  • Loss Given Default Framework Facility Characteristics in Terms of Ranking Debt Cushion Facility Rating Collateral (or equivalent) Value - Economic Basis Collateral (or equivalent) Value - Liquidation Basis Creditors Rights in Regime in which Collateral or Equivalent is domiciled Different low default portfolios present complexities unique to their particular asset class – although all can be addressed CONFIDENTIAL AND PROPRIETARY. 24. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  • Project Finance LGD Template Deliverables • Industry Specific or Generic Template in Excel • Guidance on the approach for evaluation of the risk factors influencing loss • Framework for combining the risk factors into a final LGD assessment • Guidance and recommendations on the evaluation and scoring of collateral value, enterprise value and liquidation value on a consistent basis. • Training on Application of the Template • Customization of Template(s) following review of drafts by the client • Documentation on the methodology used to develop and test the template CONFIDENTIAL AND PROPRIETARY. 25. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  • Gain These Advantages with Our Templates • Competitive advantage through better risk-based pricing; • Consistency in risk measurement and decision making; • Analysis that combines your expert knowledge with our criteria; • Use of your time and resources more effectively. • Linkage to observed default rates for S&P ratings CONFIDENTIAL AND PROPRIETARY. 26. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  • Default and Recovery Study CONFIDENTIAL AND PROPRIETARY. 27. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  • Data Pooling Consortium for Project Finance • Project Finance is a “strong” asset class – Banks concerned about the conservative Basel capital adequacy assumptions – Anecdotal evidence of high post-default recoveries – Very little empirical evidence on defaults and recoveries in the asset class • Empirical Evidence is required by banks – Advanced IRB under Basel II – Benchmarking portfolio against “the market” – Support pricing and analysis of CDOs, CLOs – Better understanding in general of post-default behaviour CONFIDENTIAL AND PROPRIETARY. 28. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  • Data Pooling Consortium for Project Finance • Originally initiated by four global banks in 2001 led by Citigroup • Currently includes 30 project finance lenders globally. There is an approval process for new members through steering committee. • Participating banks contribute data (based on data requirements approved by steering committee) annually on a confidential basis to Standard & Poor’s who aggregate and analyse it • 4,029 projects representing over 75% of global project finance syndicated loans, providing a representative and robust dataset to calculate reliable benchmarks. (# based on last year’s study, new study coming out in 2 weeks) – 334 defaulted projects – 279 projects emerged from default (consists of 965 bank tranches) CONFIDENTIAL AND PROPRIETARY. 29. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  • Database Descriptive Statistics Projects By Region (Percentage And Count) Africa & Middle East, 371 9% Asia Pacific, 467 12% Western Europe, 1412 35% • Over the past 6 years Eastern Europe, 206 The effort has produced 5% A truly global database Latin America, 343 9% Oceania, 277 North America, 953 7% 24% Defaulted Projects By Region (Percentage And Count) 35% 100 30% 84 25% D fa lte P je ts e u d ro c 63 20% 51 15% 10% 19 9 8 5% 0% Africa & Middle Asia Pacific Eastern Europe Latin America North America Oceania Western East Europe Numerals above bars represent count of def aulted projects. CONFIDENTIAL AND PROPRIETARY. 30. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  • Data Pooling Consortium for Project Finance • Deliverables: comprehensive annual report including: – Software providing the ability to view, sort and segment the data based on sectors, countries and timeframes – Software providing the ability for user to compare proprietary with the aggregate data – Commentary in addition to aggregate statistics – Distribution of projects by geography, sector , year of origination and year of default – Cumulative and marginal historical default rates, time to default and time in distress – Recovery statistics per geography and individual sectors – Recovery rates on an individual anonymous basis (by geography and sector) – Correlations CONFIDENTIAL AND PROPRIETARY. 31. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  • Standard & Poor’s Experience in Data Pooling • Risk Solutions has consortium based initiatives in a number of different geographic and asset class markets – LossStats/PMD - Largest commercially available database of USA defaulted bonds since 1988 – Industry-wide PD and LGD databases for major banks in Australia and Singapore – In discussions on building bank loan PD and LGD databases in other markets • Default rate and recovery database for European leveraged finance loans launched with 10 banks in 2006 CONFIDENTIAL AND PROPRIETARY. 32. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  • Key issues to consider: Project Finance Definition • A project company is a group of agreements and contracts among lenders, project sponsors, and other interested parties that creates a form of business organization which – issues a finite amount of debt on inception; – operates in a focused line of business; – and asks that lenders look only to a specific asset to generate cash flow as the sole source of principal, interest payments, and collateral. CONFIDENTIAL AND PROPRIETARY. 33. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  • Key issues to consider: Default Definitions • Defining default is critical – 90 Days Past Due – Distressed Sales – Distressed Restructurings – Liquidation – Charge-offs – Bankruptcy CONFIDENTIAL AND PROPRIETARY. 34. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  • Key issues to consider: Data Collection • Minimizing the pain of data collection • Standard & Poor’s provide a Project Finance template to collect data elements on all loans and defaulted transactions • Essential Data Fields – Origination and maturity date for all instruments – Debt structure (tranches) – Collateral – Default date – Recovery upon Resolution CONFIDENTIAL AND PROPRIETARY. 35. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  • Key issues to consider: Confidentiality of Data • Confidentiality of data is probably the single most important issue for banks - Standard & Poor’s has implemented procedures to address. • Two Standard &Poor’s divisions are involved in the Project Finance Consortium Operations - Standard &Poor’s Risk Solutions and Standard &Poor’s Data CoE. Both of them are separated from the ratings organization – Firewall – Experience with other data consortia – Professional management of data – Our reputation • Data flows directly from the Banks to the Project Manager • Confidentiality clause part of the Contract CONFIDENTIAL AND PROPRIETARY. 36. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  • Process and fees • Service agreement signed • S&P Risk Solutions delivers data collection template and training ahead of collection • Bank delivers data • S&P Risk Solutions verifies data (project finance definition, default definition, data cleaning) • S&P Risk Solutions analyses data and provides report • Participation fee: $50,000 for the 1st year and $25,000 annually thereafter. CONFIDENTIAL AND PROPRIETARY. 37. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  • Contacts Suzanne Smith Managing Director +1 212 438-2106 suzanne_smith@standardandpoors.com Mark Haydoutov Director +1 212 438 4643 Mark_haydoutov@standardandpoors.com Katarina Antens-miller Director +1 212 438-2526 Katarina_antens-miller@standardandpoors.com CONFIDENTIAL AND PROPRIETARY. 38. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  • Webinar Replay Information Replay Web Streaming: URL: http://www.mymeetings.com/nc/join Conference ID#: PH5510652 Passcode: SANDP1 Web replay streaming will expire on Thursday, November 15, 2007 Telephone Replay: Replay Number: 1-203-369-1923 These replays are available until Thursday, October 25, 2007 CONFIDENTIAL AND PROPRIETARY. 39. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.