《信用风险限额》PPT课件.ppt

1OutlineOverviewMarket ConcernsCredit Risk LimitsCredit Risk ModelsCredit Risk DiversificationCredit Risk Management Process2Overview:Current State of the Credit MarketAlthough Fixed Income has recently outperformed equity,the Corporate Bond market has severely underperformed TreasuriesThe market 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 in High YieldTelecom/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 utilitiesExtreme market volatility and limited liquidity best characterizes the current state of the corporate bond marketBanks are restricting access to liquidity and the resulting illiquidity is contributing to the credit markets volatilityPortfolio diversification is difficult to achieve given that 33%of amount outstanding and 42%of new issue volume are in the the top 25 namesSurvival depends on minimizing the occurrence and magnitude of distressed credits3Market ConcernsWhat is contributing to the current credit volatility?Bear equity market and corporate scandalsCredit recession(stressed credit market)Liquidity crisisHistorically low ratesEconomic recovery unclear4A Bear Market in EquityVolatility at historic highs since 19973+years upside of technology bubble2.5 years of bubble bursting and corporate scandalsVolatility measure of “%days per year S&P 500 Index moved greater than+/-1%”in August 2002 was 43%versus 22%historic average since 1925Current downturn deepest since 1973-74 and longest since 1929-32 or 1946-49At its July 2002 low,the S&P 500 was 48%below its March 2000 peak and the decline has endured for 29 months.This makes it the longest bear market since 1946/49 and together with the 1973/74 cycle,the steepest of the post-WWII period.(1)(1)TheBankCreditAnalyst,August20025A Bear Market in EquityValuations are still above historic norms on almost every measure(Price/Earnings,DividendYield,Price/Book,Price/Sales),except for EarningsYield/BondYield(which is near fair value,as bond yields are at historic lows)Earnings remain under pressureOutflows from domestic equity mutual funds and foreign sales of US stocks has intensified since June 2002(2)(2)NedDavisResearchInc.,September20026Recent Equity and Fixed Income Returns(For Periods Ended 10/31/2002)Source:Lehman,Standard&Poors7Credit Market Under StressUnprecedented numbers of distressed credits(“Fallen Angels”are investment grade credits that have been downgraded to high yield)$115 billion Fallen Angels YTD through October 2002Since 2001 default rates have exceeded 1991 highsDefault rates have been rising continuously since 1999.It has been like a credit recession for several years and I expect it to continue until default rates clearly have peaked.”Edward Altman,Ph.D.NYU Stern School of Business2001 experienced the most ever Chapter 11 filings with 170 and pre-petition liabilities of$230 billionFirst half of 2002 had 74 filings totaling$130 billionSince June 1997 a series of financial crises have resulted in huge volatility in and widening of credit spreads;this has produced sustained negative excess returns in corporate issuesMoodys downgrade/upgrade ratio rose from 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 2002Source:Lehman,Moodys,EdwardAltman8Liquidity CrisisCredit contraction in bank lending and commercial paper is causing a“liquidity crisis”,reversing trend for last 5 years of 20%annual expansionBank lending is currently 15%lower than last JulyNon-financial CP has contracted 47.7%to a low of$179.5 billion in June 2002 from high of$343.3 billion in December 2000Financial leverage(ratio of current debt to total market capitalization)of corporations increased in 2002 to 26.6%(on$4.5 trillion),the highest level since the 1990-91 recessionSource:Lehman9Historical Lows For Interest RatesAggressive Fed easing with Fed Funds at 1.25%since November 6,2002 cut of 50 bpsThe resulting yield curve is the steepest since Fall 1992Rates at 4-decade lows10-year Treasury Note yield of 3.57%on October 9th was at a 44-year lowAs of November 11,2002 the 10-year has risen 58 bps from this lowHistorically low rates led to another mortgage refinancing wave which is supporting consumer spendingExpectation is for interest rates to stay low this year,rising next year as the yield curve to flatten from the short endSource:BloombergUPDATE10Uncertainty of Economic RecoveryBlue 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 and economic growthContinued concern:Geopolitical risk may disrupt recoverySource:BlueChipConsensusForecast11Investment Grade Corporate Cumulative Excess ReturnsPeriodofNarrowingCorporateSpreadsASeriesofFinancialCrisesWorldcomEnronAsia CrisisRussia Collapse,LTCMTechnology Bubble Collapses12Source:LehmanCorporate Bond ValuationsCorporate Bond ValuationsAnything But Telecom and Pipelines!Anything But Telecom and Pipelines!(From December 31,2001 through September 30,2002)(From December 31,2001 through September 30,2002)13Avoiding Credit Disasters and Defaults is EssentialSource:Lehman(2002 YTD through October 31,2002)The first ten months of 2002 saw the largest number of Fallen Angels(Investment The first ten months of 2002 saw the largest number of Fallen Angels(Investment grade credits that have been downgraded to High Yield)in history(245 totaling grade credits that have been downgraded to High Yield)in history(245 totaling$115.4 Billion).$115.4 Billion).Niagara MohawkTelecommunications,TCI Comm,ITTUS West Capital,Columbia/HCAWaste Management,Rite AidXerox,Conseco,FinovaEnron,Calpine,JCPenney,PG&E,Lucent,Mirant,S.Cal Edison,Delta Airlines,KMartWorldcom,Qwest,Tyco,Williams Co.,Georgia Pacific,USWest Comm.,AT&T Canada,Dynegy,Nortel,Gap,Goodyear14Top 50 Fallen Angels from 1995-2002 YTDTop 50 Fallen Angels from 1995-2002 YTD WorldComs$22.8 Billion WorldComs$22.8 Billion total public debt ranks as total public debt ranks as largest fallen angellargest fallen angel Qwests$14.4 Billion is Qwests$14.4 Billion is secondsecond Tycos$8.4 Billion is thirdTycos$8.4 Billion is third Williams$8.0 Billion is Williams$8.0 Billion is fourthfourth Enrons$6.8 Billion is sixthEnrons$6.8 Billion is sixth Georgia-Pacifics$5.7 Georgia-Pacifics$5.7 Billion is in the top 10Billion is in the top 10 May 2002 will be recalled for May 2002 will be recalled for a record$42.8 Billion of a record$42.8 Billion of fallen angel debt moving fallen angel debt moving into high yieldinto high yield July 2002 was next largest July 2002 was next largest at$22.8 Billion at$22.8 Billion Cumulative$115 Billion in Cumulative$115 Billion in principal of fallen angels in principal of fallen angels in 2002 YTD is record high2002 YTD is record highSource:Lehman(2002 YTD through October 31,2002)*Index Exposure-Actual balance sheet exposure may be higher.*Credit Risk Management is Critical to PerformanceCredit Risk Management is Critical to Performance15High Yield Corporates:Index Returns and Default RatesHigh Yield Corporates:Index Returns and Default Rates (From 1980 through September 30,2002)(From 1980 through September 30,2002)Source:Lehman High Yield Index 1983-2002,*-7.63%Return is YTD through September 30,2002,Credit Suisse First Boston(CSFB)Returns for 1980-1982,Moodys Default Rates 1983-2002,*9.2%Default Rate is for annual period from October 2001-September 2002Most years of peak default rates or following year are also years of high returns:1982,1986,1991 and 199516High Yield Spreads By Credit Quality(From January 31,1990 Through September 30,2002)Source:CreditSuisseFirstBoston(CSFB)Source:CreditSuisseFirstBoston(CSFB)17Paradigm Shift in Fallen AngelsOver 20%of the Lehman High Yield Index is now comprised of former investment grade credits.Returns fell more rapidly than ever in 2001-2002,so the punishment for owning a distressed credit was severe.Good credit defense and index-like performance made for great performance18Losses in Investment Grade Bonds Occur in Months Prior to DowngradesLoss of value due to a downgrade occurs over a few prior months.Depending on the initial credit quality losses could stretch over 2 months for AAA-AA and up to 8 months for BAAThe variability of the magnitude of the loss(i.e.,Standard deviation)is very significantAverageMonthlyUnderperformanceDuetoDowngrade8/8812/01Source:Lehman19#distressed 24-month“VintageYear”issuesexcessreturnvs.UST1990 50 28.28%1991 14 40.94%.1998 29 19.33%1999 10 10.69%2000 139 8.35%Years prior 2001 250 16.56%-2001 54 -23.08%YTD Jun 2002 68 -24.21%Years since 2001 122 -23.71%All Years 372 3.35%Source:LehmanSubsequent Excess Returns(vs.UST)ofinvestment-gradebondsafterdistress*Since 2001 Long Term Relative*Performance Subsequent to Distress was Negative for Investment Grade BondsConsistentlypositiveexcessreturnssubsequenttodistressbefore2001-Since2001longhorizonexcessreturnsfordistressedbondshavebeennegativebecauseofthecreditrecessionresultingfromaliquiditycrisis*RelativetoTreasuries*Lehmandefines adistressedinvestment-gradebondasRatedBaa3orhigher;Fixedcoupon;OAStoUSTreasuriesof400bpormore;andDollarprice80%ofpar.20Absolute vs.Relative Risk:A DebateA desire to limit absolute risk has led to increased tracking error for credit defensive players that have limited issuer exposures.Index issuer considerationsShould indices represent the active investable 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 Lehman High Yield Index21Risk LimitsDivide 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,diversifyClassic:Establish limits by groups and by specific issuers overallContemporary:Use a combination of tracking error and absolute limits22Quantitative Credit Risk MetricsSpreadOASOAS volatilitySpread durationSwap spread durationReturnExcess returnVariance/Covariance of Spreads or Excess ReturnsIntegrates well with Market RiskSpreads can be difficult to measure during periods of illiquidityDefaultCDSCDS volatilityDefault Probability Loss FrequencyLoss Given DefaultTransition Probability MatrixVariance/Covariance of SpreadsCredit VaRDifficult to estimate during periods of sparse defaults23Quantititative Credit MeasuresMoodys KMV EDFs Moodys RiskCalc PDsCreditSights BondScore CREsCSFB CreditRisk+McKinsey CrPortViewRiskMetrics CreditMetrics/CreditGradesStandard&Poors24Model Comparison25Model Comparison26Quantititative Diversification ProductsDefault relatedMoodys KMVCreditGradesGifford Fong AssociatesSpread/Return basedLehman POINTBarra TotalRisk27Credit Risk Diversification by Sector and RatingCredit diversification across sectors can reduce portfolio volatility from concentration risk for credits that have a higher probability of becoming distressed or can experience higher volatility-thus reducing the standard deviation of returnsSystematic vs.Idiosyncratic RiskContagion risk has hammered certain sectors where there have been considerable bankruptcy filings and“fallen angels”;these sectors are slowly becoming more attractiveHistorically fixed income has a low probability of loss of principalCredit differences result in diversification benefitsFinancialIndustrialTelecomEnergy28Credit Diversification Downgrade Risk vs.Other Non-Systematic RiskDowngrade only idiosyncratic size ratio for different ratings:Aa-Aaa:A:Baa=9:4:1Downgrade diversify requires 9 times more low grade Baa to high grade AaaIdiosyncratic risk as stable-rated bonds experience“natural”spread volatilityTotal idiosyncratic risk less differentiated by quality than downgrade risk aloneas indicated by size ratio for different quality ratings:Aa-Aaa:A:Baa=4:3:1Diversification of total idiosyncratic risk requires only 4 times as many Baa credit to Aaa creditsSource:Lehman,LevDynkinAug14,2002,PRMIANewFrontiersinCreditRisk)29Diversification BalanceBalance minimizing tracking error vs.maximizing return or risk adjusted returnToo much diversification costs performanceDecreases security selection return from purchase of cheaper bonds30Sufficient Diversification:ConclusionsOptimal 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 4:3:1The change since 2000 was not due to change in transition probabilities,but due to return severity of 2001 downgrades.Minimize the impact through diversification in addition to using fundamental analysis to avoid selecting future fallen angels and defaultsSource:Lehman31Conclusions:Risk Management Oriented Portfolio Construction ProcessBalance fundamental credit analysis with quantitative measures,relative and defensive credit alerts Monitor absolute and relative issuer exposure,duration,convexity,spread duration and yield curve exposureIdentify many small selective risks via security level spread,portfolio scenario and tracking error analysesCredit defense:Monitor changes using leading indicators like CDS data and Credit Risk default models like Ed Altmans Z-score,Merton/Moodys KMV or hybrids like CreditSights BondScore