On Nov. 15, 2013, Standard & Poor’s Ratings Services published its revised criteria for assessing the construction risk associated with project finance infrastructure (see “Project Finance Construction Methodology”). Here we aim to answer questions that some readers raised during the request for comment or may raise about the criteria. (We refer to the construction risk criteria as the… More
While investors and issuers are beginning to recognize the impact of carbon pricing on corporate profitability, the same is less true of the effects of climate events on a company’s business and financial risk profiles. Unlike exposure to emissions regulation, which trading carbon credits and investment in emissions abatement can address, the unpredictable nature of climate events constrains the planning and implementation of effective risk management strategies. The increasing frequency of extreme weather events such as flooding, intense storms, heat waves, and cold snaps is putting pressure on companies to identify, quantify, and disclose the material risks related to such events.
The S&P 500 hit a new record this week when it briefly climbed above 1,900 on Tuesday, and the credit profiles of its rated constituents remain stable. The credit measures of the index’s constituents are stronger than those of U.S. companies in general. In contrast to U.S. corporate ratings overall, the majority (387) of the companies in the index are rated investment grade (‘BBB-‘ and higher). Through the first four months of 2014, more than twice as many companies in the index were upgraded than were downgraded, even as downgrades have outnumbered upgrades for U.S. companies overall. However, the U.S. lost one of its four ‘AAA’-rated companies in April after Automatic Data Processing Inc. (ADP) was downgraded to ‘AA’ from ‘AAA’. Despite the Federal Reserve’s moves to taper its bond purchases, bond yields have remained low and companies have actively issued debt, though at a slightly slower rate than last year. While the index constituents’ total debt has risen, the increase in leverage has been partially offset by rising cash and earnings and rating outlooks remain stable. More than 80% of the index’s rated constituents have a stable rating outlook, and the rating outlooks for the remaining companies are nearly equally split between potential upgrades and potential downgrades.
How do you measure the credit risk of new commercial mortgages during the loan origination process? Are you currently monitoring and managing risk involving your commercial real estate (CRE) portfolio?
Institutions are faced with increasing requirements to quantify risk in their CRE portfolios. These requirements come from shareholders seeking to maximize their risk adjusted return and from the regulators requiring adequate capital reserve levels. Developing accurate default and recovery models for CRE mortgage portfolios is a significant challenge due to data limitations and constraints on internal resources.
Join Moody’s Analytics for a complimentary webinar with commercial real estate credit risk experts, Christian Henkel, Director, Risk Consulting and Sumit Grover, Associate Director, CRE Product Management to discuss the following topics:
• Overview of CRE credit risk management challenges
• Data Management & Credit Risk solutions that address the needs of this asset class
• CRE Stress Testing Model & Approach
The gap between Asia-Pacific entities poised for downgrades and those poised for upgrades has narrowed since 2009, but is still more than double the region’s trailing-10-year average. As economic growth in the Asia-Pacific moderates, Standard & Poor’s has examined some of the region’s rating stress indicators and their recent performance. In this CreditMatters TV segment,…
Forecast For Defaults Worsens In All Regions
New York, NY – The outlook for credit spreads over the next three months im-proved in the latest quarterly IACPM Credit Outlook survey, especially in Europe. The IACPM Credit Spread Outlook Index for European investment grade debt rose to 25.6 in the survey taken at the end of the first quarter compared to negative -5.1 at the end of the fourth quarter last year. The Index for high yield debt improved to 18.4 from 2.6. The overall IACPM Credit Spread Outlook Index, which includes North America, Asia and Australia, as well as Europe, rose from 1.8 to 14.6.
At the same time, however, the outlook for defaults worsened in every region of the world, including Europe. The Aggregate IACPM Credit Default Outlook Index, which forecasts defaults over the next 12 months, fell to minus -14.6 in the latest read-ing from a positive 4.5 at the end of last year. The Index fell from 14.2 to minus -4.4 in Europe and minus -11.2 in Asia to minus -47.4.
“It’s a bit counter intuitive that the outlook for spreads can tighten while the outlook for defaults gets worse but it’s actually normal at this point in the credit cycle,” commented Som-lok Leung, Executive Director of the IACPM. “We have been recov-ering from the last recession for a long period and at some point interest rates will go up, causing more companies to run into trouble. At the same time, however, as rates remain low, spreads can continue to tighten.”
The improved outlook for credit spreads in Europe is pronounced, as well as cyclical. Europe was especially hard hit during the financial crisis and is now bouncing back from a deep hole. Survey respondents note, however, while the short term outlook for spreads in Europe has improved, structural problems remain unresolved, posing significant risk over the long term.
To a greater or lesser extent around the globe, portfolio managers, as well as investors in general, are grappling with the same dichotomy. Short term prospects appear favorable, or at least, benign but, longer term, the risk of rising defaults is substan-tial. Market participants have to balance short term tactical considerations with longer term strategic ones.
“The risk is clear. If you hedge your position today, you could suffer mark-to-market losses as spreads tighten. On the other hand, if you don’t hedge, you could be exposed to even bigger problems when defaults finally do rise,” said Mr. Leung. “As one of our members points out, if you have a short term tactical reason to hedge now, it could be a win-win. You’d be protected now, as well as in the future.”
The credit outlook survey is conducted among members of the International Association of Credit Portfolio Managers, which is an association of credit portfolio managers at 93 financial institutions located in 17 countries in the U.S., Europe, Asia, Africa and Australia. Members include portfolio managers at many of the world’s largest commercial banks, investment banks and insurance companies, as well as a number of asset managers. Members are surveyed at the beginning of each quarter.
Survey results are calculated as diffusion indexes, which show positive and negative values ranging from 100 to minus -100, as well as no change which is in the middle of the scale and is recorded as “0.0.” Positive numbers signify an expectation for improved credit conditions, specifically fewer defaults and narrower spreads, while negative numbers indicate an expectation of deterioration with higher defaults and wider spreads.
Please click here to access a selection of aggregated survey data.
The full aggregated survey results will be published with a 6 months time lag in the members only section of our website. Please click here to access prior quarters’ survey results.
The IACPM, with 93 member institutions located in 17 countries, is a professional association dedicated to the advancement of credit portfolio management. Founded in 2001, the organization’s programs of meetings, studies, research and collaboration are designed to increase awareness of the value and function of credit portfolio management among financial markets worldwide, and to discuss and resolve issues of common interest to its members.
SINGAPORE (Standard & Poor’s) May 16, 2014–Standard & Poor’s Ratings Services expects the new India government’s reform initiatives in economic and fiscal policies in the next two to three months may have significant implications on the sovereign credit rating on India (BBB-/Negative/A-3). The National Democratic Alliance (NDA), led by the Bharatiya Janata Party (BJP), is winning the lower house … More
This report presents the results of an in-depth study into corporate bond markets globally. The body of the report offers fact-based descriptions of notable developments and issues over the last thirteen years and looks forward to identify potential issues for further research. The main data sources underpinning the findings and conclusions in this report are: Dealogic, Bloomberg, Bank of International Settlements, Asian Bonds Online, SIFMA, IMF and the World Bank. Findings can be summarized under the following four key messages:
(1) Over the last decade or so, corporate bond markets have become bigger, more important for the real economy, and increasingly global in nature.
Corporate bond markets have almost tripled in size since 2000, reaching $49 trillion in 2013. Growth stalled in the wake of this financial crisis as banks began deleveraging their balance sheets. However, the amount outstanding from non-financial firms has continued to expand.
Market depth (amount outstanding as a percentage of GDP) has been increasing amongst developed and emerging markets, averaging 169% for developed markets and 24% for emerging markets in 2013. Deepening markets can suggest increasing reliance on corporate bond markets to meet the financing needs of an economy.
Corporate bond financing has increased as a proportion of total global corporate financing (which includes corporate bond financing, bank financing and equity market financing). In 2004, corporate bond financing made up 24% of total financing, increasing to 25% in 2012. Bank lending still dominates, making up 52% of total financing in 2012.
The mid-2013 stumble laid bare the corporate-bond market’s structural problems. Greater adoption of electronic trading may help if dealers and investors act now.
December 2013 | by Roger Rudisuli and Doran Schifter
See full report at
Several large global banks–including J.P. Morgan and Deutsche Bank–reported sizable charges to earnings in the fourth quarter of 2013 because of implementing a FVA framework for over-the-counter derivatives and structured notes. The charges ($1.5 billion and €364 million–or $501million–for JP Morgan and Deutsche, respectively) reflect a general migration by large global banks to incorporate the cost or benefit of unsecured funding into derivative valuations. Pre-financial crisis, derivative assets and liabilities were often valued with either minor or no adjustments for default risk, collateral cash flows, liquidity risk, funding costs, and other factors. Post-financial crisis, these costs have become more pronounced and industry practice has changed to take many of these factors into account. In our view, improved quantitative and qualitative disclosures are warranted to better enable analysis.
Firms on the buy side are under tremendous pressure to raise the bar on their risk management capabilities—driven by factors such as changing investor priorities, sophisticated investment strategies, and global regulatory pressures. In the midst of growing regulatory scrutiny and heightened client expectations, firms will need to develop new capabilities to implement investment strategies that are more diversified, defensive, and “risk-transparent.” At the same time, firms must carefully navigate the uncertainties and overheads around the nascent swaps trading and clearing ecosystem. It will remain critical for investment firms to adopt efficient operating models in order to demonstrate value-added “alpha”, and be operationally lean to mitigate the potential impact on risk-adjusted returns.
This webinar will highlight recommendations and response strategies to address these pain points. We will move towards a synthesis of emerging best practices observed, and point to future factors for success. With this foundation, we will review some key findings from a Celent Impact Note, and the opinions of senior leaders participating in associated panel discussions in New York and London.
We are looking forward to your participation in this webinar, an important opportunity to hear about trends that will likely have a continued and lasting effect on the buy side.
Webinar registrants will receive a copy of the Celent Impact Note, “Buy Side Risk Management: Oiling the Swaps Machinery,” at no charge after the webinar.
Cubillas Ding, Senior Research Director, Celent Research (an Oliver Wyman Company)
Mr. Ding’s expertise lies in global financial markets, securities IT strategy, and enterprise risk management. His research focuses on market risk, credit risk, operational risk, and regulatory compliance, as well as the latest regulatory developments such as Basel II, Sarbanes-Oxley, Solvency 2, anti-money laundering/know your customer (AML/KYC), and International Accounting Standards legislation and their impact on financial institutions. His recent consulting work involves advising clients on vendor solutions, compliance best practices, and understanding regulatory impact to business models. Mr. Ding has been widely referenced in the press, including Wall Street & Technology, Risk magazine, and Operational Risk & Compliance.
Matthew Streeter, CFA, Product Marketing Manager
Matthew is responsible for understanding client business issues in the derivatives marketplace and translating them into industry-leading products and solutions. Before joining FINCAD, Matthew worked on the merging of Bank of America and Merrill Lynch systems within the rates derivatives and structuring businesses. Previously, he held positions at JP Morgan, Société Generale Equity Derivatives, Wachovia Capital Markets and Deutsche Bank. His expertise is wide ranging: trade execution, trading book hedging, PnL attribution, building pricing models, risk analysis and reporting. He has also modeled, structured and hedged retail and institutional issuances.
Despite market turmoil during the summer–mainly because of announcements from the Federal Reserve that it was considering beginning to taper its bond purchases–corporate borrowers ultimately had a relatively stable 2013. In the full year, 81 global corporate issuers defaulted, relatively unchanged from 83 in 2012 (see table 1). These 81 defaulted issuers accounted for a total of $97.3 billion in debt, up from $86.7 billion in 2012.
Overall, credit quality and stability increased in 2013 (see table 6). The ratio of downgrades to upgrades decreased relative to 2012, though the average number of notches recorded among downgrades rose marginally to 1.385 from 1.375. The average number of notches for upgrades fell to 1.14 from 1.16 (see chart 13).
Read full report here
Election outcomes generally don’t affect the economy beyond improving sentiment. However, we believe the outcome of India’s general election can provide an insight into the political stability, ability, and willingness of the new government to implement much-needed reforms to restore higher economic growth. Standard & Poor’s Ratings Services believes the direction and pace of policy reforms, more than which political party takes control, can affect the ratings on the sovereign as well as corporate entities and banks. In our view, a decisive mandate can create an enabling environment for speedy resolution of policy bottlenecks and reforms, and improve private sector investments. This can lay the foundation for India’s return to a stronger and healthier phase of growth in the medium term. Conversely, a fragile government could further delay critical reforms as decision-making gets hampered, curbing revival in the investment cycle and derailing growth. (Watch the related CreditMatters TV segment titled “How Critical Will The New Government’s Reform Policies Be To The Credit Profile Of Indian Corporates And Banks?,” dated April 15, 2014.)
(Editor’s note: The views expressed here are those of Standard & Poor’s chief global economist. While these views can help to inform the ratings process, sovereign and other ratings are based on the decisions of ratings committees, exercising their analytical judgment in accordance with publicly available ratings criteria.)
Five years after the global financial system came to the brink of collapse and the global economy was plunged into recession, the global economic outlook looks relatively good. Radical policy interventions helped to stave off another Great Depression, most economies have been expanding since mid-2009, and most emerging markets, led by China, after absorbing the shock of an export demand collapse, have managed to continue to grow at a decent clip. Things could have been a lot worse. And after five years of balance sheet adjustment and policymakers internalizing and attempting to institutionalize the lessons of the crisis and what caused it, the outlook for the next five years looks significantly better than the last.
|Date: Tuesday May 20, 2014
Time: 11:00 am EDT | 4:00 pm BST | 11:00 pm HKT
Duration: 60 minutes
Financial firms are facing significant challenges when it comes to measuring and assessing risk from counterparties. In the aftermath of the 2008 financial crisis, progress measuring the broad array of financial transactions with other institutions remains uneven and progress toward consistent, timely and accurate reporting of top counterparty exposures has yet to fall in line with regulatory standards as well as industry best practices. The area of greatest concern remains firms’ inability to quantify counterparty risk consistently produce high-quality data on a regular basis.
Cady North, Senior Finance Analyst, Bloomberg Government
Robert Scanlon, former Group Chief Credit Officer of Standard Chartered Bank; Principal, Scanlon Associates
- Green bonds give investors an innovative way of supporting clean energy, mass transit, and other low-carbon projects that can help countries adapt to and mitigate climate change.
- The World Bank has mobilized over $4.5 billion through 60 green bond transactions in 17 currencies, and the IFC has issued $3.4 billion in green bonds, including two $1 billion issuances in 2013.
- New Green Bond Principles and a call to double the market by September are helping expand the young market and attracting a new set of investors.