Course dates
This program is highly intensive, interactive and encourages participation. Hands-on exercises, deal analysis, examples and case studies reinforce concepts and help deliver solutions.
On this 3 day course delegates will learn:
- Understand the implications of Basel III new and pending capital requirements
- Determine value-at-risk capital allocation and utilize RAROC pricing models
- Understand interest rate risk in the banking book, convexity and immunization of (market) portfolio risk
- Apply advanced cash flow, stochastic forecasting, loan book (portfolio) optimization, capital allocation, industry analysis to commercial lending within the context of the new Basel III accords
- Apply advanced analytical tools to better understand changes in economic, industry and company conditions with respect to the proposed Basel III countercyclical buffer
- Chose and apply the most appropriate optimization method to loan portfolios: discrete, dynamic or stochastic optimization, and how methodology improves capital allocation under the new Basel III accords
- Master migration risk and learn how to use risk matrices to price and value loans and govern the loan portfolio optimally under uncertainty
- Learn how to build and use interactive and local corporate and specialized lending risk rating systems
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 optimization demos.
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 requirements
- Dealing with excessive credit growth and acceleration of the build-up of the; conservation buffet
Review of 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 – Crochet Candy Corporation: Analysis of a weak credit
Advanced Cash Flow Workshop and Why Crucial in Context of Basel III
- Developing a bankers cash flow statement
- Reconciliation how to spot funny money”
- Cash flow analysis of projects and joint ventures in India
- The art of merging cash flow and ratio analysis
- How does cash flow know-how help bankers build up value drivers
- Tie in to new capital accords
Case study –Gem Furniture: reconstruction of cash flow and analysis
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 financial needs
- Introduction to Monte Carlo computer simulation
- Sensitivity analysis versus Stochastic (simulations) projections
Defining Assumptions
Defining Forecasts
Working with Confidence Levels
- Determining default frequencies
Day Two
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.
Using Option Theory to Reduce FX Risk through Currency Hedges, Extract Credit Information Embedded in the Equity Markets, and Employ Options Analysis in Determination of EDF
- Analyzing commodity price risk and hedging
- Avoiding value hurting hazards of loan pricing errors
- Factoring volatility estimates into loan pricing
- Volatility & 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 & pricing
- Determining option pricing assumptions, loan yields associated with the volatility of
- borrowers' percentage returns
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 at a money canter bank.
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 Optimization
- Identify a borrower’s optimal maximum/minimum values subject to constraints
- How to handle nonlinear relationships using stochastic optimization to analyze financing of corporate restructurings
- Portfolio optimization and efficient allocation of resources and projects, along with efficient frontiers
- Chose and apply the most appropriate optimization method to loan portfolios: discrete, dynamic or stochastic optimization,
- Rolled-up projects: correlated with one another
- Creating an optimal portfolio mix given allocation of loan exposures across multiple Industries
Case study – RI Furniture Corporation. Using stochastic optimization and valuation models to evaluate the credit risk of corporate restructuring
Short examples series: optimization - continuous portfolio allocation
Day Three
Framework for Developing Stochastic Computerized RAROC Pricing Models
- Class discussion: how do banks price loans
- Past, present and future of loan pricing
- Incorporating computerized 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 center
Basel Committee Guidance on Sound Credit Risk Assessment and Valuation for Loans: Valuing the Obligor’s Business
- Performing a liquidation valuation (assets, collateral and residual value)
- Step-by-step development of a comprehensive corporate appraisal
- Liquidation vs. cash flow value
- Restructuring decision making
- Last transaction approach
- Valuation multiples approach
- Cash flow valuation
- Stochastic valuation: employing state-of-the-art valuation software
- Developing the McKinsey restructuring pentagon
- Closing value and perception gaps
- Valuing a multi business
- Determining capital costs and capital structure of a multi business
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 & loan portfolio Optimization
- Ratings grids and loss given default
- Standards & guidelines: Basel II and regulatory issues
- Borrower and transaction risks
- Evaluating and setting up obligor financial measure weights
- Evaluation collateral & guarantees
- Transfer and portfolio risk
- Specialized lending advanced risk rating systems
Project finance
Commodity finance
Object finance
Income producing real estate
Application: Risk rating of energy firm
Interest rate risk in the banking book
- The yield curve
- Interest rate risk
- Duration and convexity
- Swaps, caps and collars
- Duration and portfolio immunization
Case Study - Avon Pension Fund Ltd. Portfolio Immunization Strategies,duration and covexity
New York Hotel, New York, United States
This program takes place on a non-residential basis at a New York hotel. Non-residential course fees include training facilities, documentation, lunches and refreshments for the duration of the programme. Delegates are responsible for arranging their own accommodation, however, a list of convenient hotels (many at specially negotiated rates) is available upon registration.
As with all Euromoney Training programmes on-site administrators are with you throughout the programme to ensure smooth administration and group interaction.
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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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