Course overview
'Portfolio Credit Risk Masterclass' is designed for bankers, credit and product specialists and other professionals responsible for maintaining top quality loan portfolios, identifying risk management opportunities, dealing with liquidity and interest rate risk in the banking book, and designing financial solutions for clients in a new and evolving international credit environment that must now consider Basel III. This means bankers should employ stochastic credit structures and risk management methodology which was absent in days prior to the global financial crisis.
Summary of course content
- Understand the implications of Basel III new and pending capital requirements
- Polish your credit skills and develop critical analytical decision making processes
- Apply state-of-the art cash flow techniques to uncover accounting irregularities
- Review the implications of market risk, commodity price risk and operating risk under Basel III
- Apply advanced analytical tools to better understand changes in economic, industry and company conditions
- Apply the most appropriate optimisation method to loan portfolios: discrete, dynamic or stochastic optimisation, and how methodology improves capital allocation under Basel III
- Master migration risk and learn how to use risk matrices to price and value loans and govern the loan portfolio optimally under uncertainty
- Reduce operating risk by learning to build Basel III compliant interactive and local corporate and specialised lending risk rating systems
Methodology
This programme is highly intensive and interactive. Hands-on exercises, deal analysis, examples and case
studies reinforce concepts and help deliver solutions.
Delegates will receive a copy of the author's book Credit Engineering for Bankers. The book includes 30-day
trial versions of Risk Simulator, Real Options SLS, and Basel Modelling Toolkit software.
Prerequisites
Delegates should have some familiarity or prior experience in lending, or a risk management background. Pre course work includes selected readings on simulation, real options and optimisation demos.
Computer-Based Exercises
All delegates should bring their laptops to facilitate in-class studies and exercises. Laptops should have recent versions of Microsoft Excel and Risk Simulator 5.4. Trial copies of the simulation software are available free of charge from: http://www.realoptionsvaluation.com/download.html
Who should attend this training course?
- Credit managers and analysts
- Treasury managers
- Risk and financial analysts
- Corporate and investment bankers
- Research and ratings personnel
- Portfolio managers
- Bank regulators
- Management and strategy venture capital executives
- Accountants
- Corporate and bank consultants
Partner
Supporting publications
DAY ONE
Comprehensive review of Basel III
- Differences between Basel II and Basel III
- Core tier 1 capital ratio
- Purpose of capital conservation buffer
- Discussion of the countercyclical buffer range
- Regulatory capital ratio
- Resolution of differences between total capital requirements and tier 1 requirement
- Dealing with excessive credit growth and acceleration of the build-up of the conservation buffer
Introduction to the new banking environment: modelling financial analysis and risk management and the role of new technology in Basel III compliance
- Advances in financial technology for bankers: data mining systems; visual modelling; simulations; real
options; stochastic optimisation; neural networks
- Sensitivity vs. stochastic credit analysis
- NPV and IRR vs. real options
- Excel vs. visual modelling deal analysis
- Deterministic vs. stochastic loan portfolio optimisation
Class discussion
Review of the fundamentals of credit risk management and identifying troubled loans
- The Prism Credit Model
- Management and administration
- Business operations and bank relationship
- Loan purpose and repayment
- Protecting the loan: setting up a matrix system
Case study: Jen Krist
Analysis of weak credit
Financial distress models and methodology and Basel III
Class discussion: regulatory issues managing problem loans in Asian banks
– Checklist of storm signals
- Financial distress models
- Valuation
- Borrowing base facility
- Auditing techniques
- How to stop the bleeding
- Short term vs. long term workout strategies
DAY TWO
Advanced cash flow workshop
- What are sources and uses of cash?
- Developing a bankers cash flow statement
- Reconciliation how to spot "funny money"
- Checklists that ensure reliability of your cash flow analysis
- Cash flow analysis of projects and joint ventures in Asia
- The art of merging cash flow and ratio analysis
- How does cash flow know-how help bankers build up value drivers?
Case study: Gem Furniture
Reconstruction of cash flow and analysis
Case study: Enron
What went wrong?
Standard projections vs. stochastic analysis
- Adjusting critical assumptions and value drivers including economic and industry analysis, operating profit margins, working capital requirements, capital expenditures, cost of capital
- Understanding an obligor's
- Why stochastic analysis is important in a Basel III context
- Introduction to Monte Carlo computer simulation
- Sensitivity analysis vs. stochastic (simulations) projections
- Defining assumptions
- Defining forecasts
- Working with confidence levels
- Determining default frequencies
Exercise: piece of cake company Using simulation software to compare deterministic and stochastic projections
Case study: international drug corporation
Delegates determine appropriate (stochastic) distributions, the forecast variable, run simulations, select (frequency chart) confidence levels, call up reports and evaluate project managers' proposal to the bank
Harvard case study: Savannah West
Delegates work in teams to evaluate simulations, construction project under uncertainty, valuations, investment analysis to arrive at a decision and structure the deal properly
Option theory: reduce FX risk by hedging currencies, extract credit information embedded in the equity markets, and assess default frequencies
- The math behind option theory
- Avoiding loan pricing errors
- Factoring volatility estimates into loan pricing
- Volatility and debt/equity values
- Determining the riskless hedge through the N(dl) component of option pricing
- Finding probabilities that options finish 'in the money' through N(d2) component of the option formula
- Employing options in pricing and valuation decisions
- Quantifying the trade off between risk and pricing
- Determining option pricing assumptions, loan yields associated with the volatility of borrowers' percentage returns
- Determine commodity price risk and hedging
Deal analysis: petroleum development corporation
Evaluating the credit’s put and call pricing structure yielding 30% minimum facility IRR. Delegates
review the proposal's decision making
DAY THREE
Analysing the obligor's business, industry and risk profile
- Analysing sector specific drivers in Asia
- Industry loan portfolio methodology
- Company operations, key competitors, the impact of economic factors, the pattern of industry growth and earnings
- Identifying and quantifying risk factors
Case study: printing industry
How to develop a comprehensive/professional industry analysis
Default correlations
- Deriving default correlations
- The equity driven approach
- Other approaches (spread correlation)
- Recent empirical findings on correlation
- Default correlations and targeting the "efficient frontier"
Case study: rating agency analysis of portfolio credit linked note
Portfolio and resource optimisation and Basel III
- Identify a borrower's optimal maximum/minimum values subject to constraints
- How to handle nonlinear relationships using stochastic optimisation to analyse financing of corporate
restructurings
- Portfolio optimisation and efficient allocation of resources and projects, along with efficient frontiers
- Apply the most appropriate optimisation method to loan portfolios: discrete, dynamic or stochastic
- Rolled-up projects: correlated with one another
- Creating an optimal portfolio mix given allocation of loan exposures across multiple industries
- Portfolio resource optimisation, and the new accords
Case study: RI Furniture Corporation
Using stochastic optimisation and valuation models to evaluate the credit risk of corporate restructuring
Short examples series: optimisation - continuous portfolio allocation
Framework for developing stochastic computerised RAROC pricing models
Class discussion: how do banks price loans
- Past, present and future of loan pricing
- Incorporating computerised risk rating systems into the pricing matrix to determine hurdle ROE, ROA and RAROC (the loan area requires)
- How the facility's "expected loss frequency" affects the pricing of the facility
- Credit VaR and risk-adjusted performance measurement
- Loan servicing and activity costs
- The "fee-in-lieu-of-balances" calculation
- Determining probabilities loan pricing falls below RAROC mandated by the bank/profit centre
DAY FOUR
Valuing the obligor’s business - comparing valuation methods
- Performing a liquidation valuation (assets, collateral and residual value)
- Step-by-step development of a comprehensive corporate appraisal
- Book value method
- Liquidation vs. cash flow value: restructuring decision making
- Last transaction approach
- Valuation multiples approach
- Cash flow valuation
- Advantages and disadvantages of each method
- Stochastic valuation: employing state-of-the-art valuation software
- Assessing success probabilities
Debt and corporate restructuring under uncertainty: alternatives and implications
- Asset swaps
- Stochastic resolution of "value gaps"
- Equity swaps
- Stock exchanged for debt forgiveness
- Stochastic valuations uses: equity swaps
- Modification of debt terms
- Developing the McKinsey restructuring pentagon
- The restructuring pentagon framework
- Closing value and perception gaps
- Valuing a multibusiness
- Determining capital costs and capital structure of a multibusiness
- Performing business unit valuations
- Spin offs, sell offs, equity carve outs and LBO's
Case study: AFCE enterprises
Computer analysis and valuation of strategic divestitures of major company brands
How to develop interactive (local environment) industry specific credit rating grids for borrowers/facilities
- The risk grading process
- Risk rating and loan portfolio optimisation
- Ratings grids and loss given default
- Standards and guidelines: Basel II and regulatory issues
- Borrower and transaction risks
- Evaluating and setting up obligor financial measure weights
- Evaluation collateral and guarantees
- Transfer and portfolio risk
- Specialised lending advanced risk rating systems
- Project finance
- Commodity finance
- Object finance
- Income producing real estate
Application: risk rating of energy firm
Basel III and market risk
- The yield curve
- Interest rate risk
- Duration: basic concepts
- Duration and convexity swaps, caps and collars
- Duration and portfolio immunisation
Case study: Avon Pension Fund Ltd. Portfolio Immunisation Strategies, duration and convexity
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Morton Glantz
Professor Morton Glantz is an internationally renowned educator, author, and banker. He serves as a financial consultant, educator, and adviser to a broad spectrum of professionals, including corporate financial executives, government ministers, privatisation managers, investment and commercial bankers, public accounting firms, members of merger and acquisition teams, strategic planning executives, management consultants, attorneys, and representatives of foreign governments and international banks. Prof. Glantz is a principal of Real Consulting and Real Options Valuation, firms specialising in risk consulting, training, certification, and advanced analytical software in the areas of risk quantification, analysis, and management solutions.
As a senior officer of JP Morgan Chase, Professor Glantz built a progressive career path specialising in credit analysis and credit risk management, risk grading systems, valuation models, and professional training. He was instrumental in the reorganization and development of the credit analysis module of the Bank’s 3 Management Training Program—Finance, which at the time was recognised as one of the foremost training programs in the banking industry. A partial list of client companies Professor Glantz has worked with includes The Federal Financial Institutions Examination Council, Institutional Investor, The Development Bank of Southern Africa, CUCORP, Canada, East African Development Bank, NBS Bank, Malawi, Access Bank, Nigeria, The Central Bank of Nigeria, The Bank of China, GE Capital, Cyprus Development Bank, Misr Iran Development Bank (Cairo), Gulf Bank (Kuwait), Institute for International Research (Dubai), Inter-American Investment Corporation, Ernst & Young, UAL Merchant Bank ( Johannesburg), Euromoney, ICICI Bank (India), Council for Trade and Economic Cooperation (Russia), BHF Bank, and IBM Credit Corporation.
Morton is on the adjunct finance faculty at the Fordham Graduate School of Business. He has appeared in Harvard University International Directory of Business and Management Scholars and Research and earned Fordham University Deans Award for Faculty Excellence on three occasions. He is a Board Member of the International Standards Board, International Institute of Professional Education and Research (IIPER). The IIPER is a global institute with partners and offices around the world, including the United States, Switzerland, Hong Kong, Mexico, Portugal, Singapore, Nigeria, and Malaysia. Areas of expertise include advanced forecasting methods; advanced credit risk analysis; credit portfolio risk management; essentials of corporate finance; corporate valuation modelling and analysis; credit risk analysis and modelling; project finance and corporate failure.
He received an MBA Finance from New York University; B.B.A., magna cum laude Baruch College, City University of New York. Professor Glantz is widely published in financial journals and has authored seven books published internationally.
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