《信用风险限额》PPT课件.ppt

1、Outline,Overview Market Concerns Credit Risk Limits Credit Risk Models Credit Risk Diversification Credit Risk Management Process,Overview:Current State of the Credit Market,Although Fixed Income has recently outperformed equity, the Corporate Bond market has severely underperformed Treasuries The m

2、arket has experienced rising defaults, downgrades, and an unprecedented number of Investment Grade credits falling into High Yield (a.k.a. “Fallen Angels”) “Fallen Angels” are overwhelming the High Yield market as they number 14 of the top 25 issuers and comprise 20% of the total amount outstanding

3、in High Yield Telecom/Energy have been at the core of the fundamental deterioration in credit with outsized spending to meet unrealistic demand expectations and aggressive expansions into energy trading in utilities Extreme market volatility and limited liquidity best characterizes the current state

4、 of the corporate bond market Banks are restricting access to liquidity and the resulting illiquidity is contributing to the credit markets volatility Portfolio diversification is difficult to achieve given that 33% of amount outstanding and 42% of new issue volume are in the the top 25 names Surviv

5、al depends on minimizing the occurrence and magnitude of distressed credits,Market Concerns,What is contributing to the current credit volatility? Bear equity market and corporate scandals Credit recession (stressed credit market) Liquidity crisis Historically low rates Economic recovery unclear,A B

6、ear Market in Equity,Volatility at historic highs since 1997 3+ years upside of technology bubble 2.5 years of bubble bursting and corporate scandals Volatility measure of “% days per year S this has produced sustained negative excess returns in corporate issues Moodys downgrade/upgrade ratio rose f

7、rom 1.4 in 1998 to 4.1 Moodys year-to-year defaults rose from 1.3% in 1998 to 10.53% in June 2002 and are at 9.2% for September 2002,Source: Lehman, Moodys, Edward Altman,Liquidity Crisis,Credit contraction in bank lending and commercial paper is causing a “liquidity crisis”, reversing trend for las

8、t 5 years of 20% annual expansion Bank lending is currently 15% lower than last July Non-financial CP has contracted 47.7% to a low of $179.5 billion in June 2002 from high of $343.3 billion in December 2000 Financial leverage (ratio of current debt to total market capitalization) of corporations in

9、creased in 2002 to 26.6% (on $4.5 trillion), the highest level since the 1990-91 recession,Source: Lehman,Historical Lows For Interest Rates,Aggressive Fed easing with Fed Funds at 1.25% since November 6, 2002 cut of 50 bps The resulting yield curve is the steepest since Fall 1992 Rates at 4-decade

10、lows 10-year Treasury Note yield of 3.57% on October 9th was at a 44-year low As of November 11, 2002 the 10-year has risen 58 bps from this low Historically low rates led to another mortgage refinancing wave which is supporting consumer spending Expectation is for interest rates to stay low this ye

11、ar, rising next year as the yield curve to flatten from the short end,Source: Bloomberg,UPDATE,Uncertainty of Economic Recovery,Blue Chip consensus GDP growth is forecast at 1.6% in Q4-2002 and 3.3% in 2003. Concerns that declines in equity markets and financial wealth could reduce consumer spending

12、 and economic growth Continued concern: Geopolitical risk may disrupt recovery,Source: Blue Chip Consensus Forecast,Investment Grade Corporate Cumulative Excess Returns,Period of Narrowing Corporate Spreads,A Series of Financial Crises,Worldcom,Enron,Asia Crisis,Russia Collapse, LTCM,Technology Bubb

13、le Collapses,Source: Lehman,Corporate Bond ValuationsAnything But Telecom and Pipelines! (From December 31, 2001 through September 30, 2002),Avoiding Credit Disasters and Defaults is Essential,Source: Lehman (2002 YTD through October 31, 2002),The first ten months of 2002 saw the largest number of F

14、allen Angels (Investment grade credits that have been downgraded to High Yield) in history (245 totaling $115.4 Billion).,Niagara Mohawk,Telecommunications, TCI Comm, ITT,US West Capital, Columbia/HCA,Waste Management, Rite Aid,Xerox, Conseco, Finova,Enron, Calpine, JCPenney, PG Fixed coupon; OAS to

15、 US Treasuries of 400bp or more; and Dollar price 80% of par.,Absolute vs. Relative Risk: A Debate,A desire to limit absolute risk has led to increased tracking error for credit defensive players that have limited issuer exposures. Index issuer considerations Should indices represent the active inve

16、stable universe of the few active issues available? Or should index providers keep large numbers of illiquid issues? Should indices caps the max percentage for an individual issuer? Should limits be placed on the amount outstanding for currently dominant credits? Fallen Angels comprise over 20% of L

17、ehman High Yield Index,Risk Limits,Divide investment grade corporates into groups by quality (AAA, AA, A, BBB), by sectors (or even subsectors), and by duration (02, 3-5, 610, 10+) High yield: diversify, diversify, diversify Classic: Establish limits by groups and by specific issuers overall Contemp

18、orary: Use a combination of tracking error and absolute limits,Quantitative Credit Risk Metrics,Spread OAS OAS volatility Spread duration Swap spread duration Return Excess return Variance/Covariance of Spreads or Excess Returns Integrates well with Market Risk Spreads can be difficult to measure du

19、ring periods of illiquidity,Default CDS CDS volatility Default Probability Loss Frequency Loss Given Default Transition Probability Matrix Variance/Covariance of Spreads Credit VaR Difficult to estimate during periods of sparse defaults,Quantititative Credit Measures,Moodys KMV EDFs Moodys RiskCalc

20、PDs CreditSights BondScore CREs CSFB CreditRisk+ McKinsey CrPortView RiskMetrics CreditMetrics/CreditGrades Standard these sectors are slowly becoming more attractive Historically fixed income has a low probability of loss of principal Credit differences result in diversification benefits Financial

21、Industrial Telecom Energy,Credit Diversification Downgrade Risk vs. Other Non-Systematic Risk,Downgrade only idiosyncratic size ratio for different ratings: Aa-Aaa:A:Baa = 9:4:1 Downgrade diversify requires 9 times more low grade Baa to high grade Aaa Idiosyncratic risk as stable-rated bonds experie

22、nce “natural” spread volatility Total idiosyncratic risk less differentiated by quality than downgrade risk alone as indicated by size ratio for different quality ratings: Aa-Aaa:A:Baa = 4:3:1 Diversification of total idiosyncratic risk requires only 4 times as many Baa credit to Aaa credits,Source:

23、 Lehman, Lev Dynkin Aug 14, 2002, PRMIA New Frontiers in Credit Risk),Diversification Balance,Balance minimizing tracking error vs. maximizing return or risk adjusted return Too much diversification costs performance Decreases security selection return from purchase of cheaper bonds,Sufficient Diver

24、sification: Conclusions,Optimal size ratio to minimize risk of underperformance due to downgrades for Aaa/Aa, A and Baa portfolio is 9:4:1 (was 7:3:1 prior to 2001) Optimal size ratio to minimize risk of underperformance due to natural spread volatility for Aaa/Aa, A and Baa portfolio is 4:3:1 The change since 2000 was not due to change