《信用风险限额》PPT课件

OutlineOverviewMarketConcernsCreditRiskLimitsCreditRiskModelsCreditRiskDiversificationCreditRiskManagementProcessOverview:CurrentStateoftheCreditMarketAlthoughFixedIncomehasrecentlyoutperformedequity,theCorporateBondmarkethasseverelyunderperformedTreasuriesThemarkethasexperiencedrisingdefaults,downgrades,andanunprecedentednumberofInvestmentGradecreditsfallingintoHighYield(a.k.a.“FallenAngels”)“FallenAngels”areoverwhelmingtheHighYieldmarketastheynumber14ofthetop25issuersandcomprise20%ofthetotalamountoutstandinginHighYieldTelecom/EnergyhavebeenatthecoreofthefundamentaldeteriorationincreditwithoutsizedspendingtomeetunrealisticdemandexpectationsandaggressiveexpansionsintoenergytradinginutilitiesExtrememarketvolatilityandlimitedliquiditybestcharacterizesthecurrentstateofthecorporatebondmarketBanksarerestrictingaccesstoliquidityandtheresultingilliquidityiscontributingtothecreditmarket’svolatilityPortfoliodiversificationisdifficulttoachievegiventhat33%ofamountoutstandingand42%ofnewissuevolumeareinthethetop25namesSurvivaldependsonminimizingtheoccurrenceandmagnitudeofdistressedcreditsMarketConcernsWhatiscontributingtothecurrentcreditvolatility?BearequitymarketandcorporatescandalsCreditrecession(stressedcreditmarket)LiquiditycrisisHistoricallylowratesEconomicrecoveryunclearABearMarketinEquityVolatilityathistorichighssince19973+yearsupsideoftechnologybubble2.5yearsofbubbleburstingandcorporatescandalsVolatilitymeasureof“%daysperyearS&P500Indexmovedgreaterthan+/-1%”inAugust2002was43%versus22%historicaveragesince1925Currentdownturndeepestsince1973-74andlongestsince1929-32or1946-49AtitsJuly2002low,theS&P500was48%belowitsMarch2000peakandthedeclinehasenduredfor29months.Thismakesitthelongestbearmarketsince1946/49andtogetherwiththe1973/74cycle,thesteepestofthepost-WWIIperiod.(1)(1)TheBankCreditAnalyst,August2002ABearMarketinEquityValuationsarestillabovehistoricnormsonalmosteverymeasure(Price/Earnings,DividendYield,Price/Book,Price/Sales),exceptforEarningsYield/BondYield(whichisnearfairvalue,asbondyieldsareathistoriclows)EarningsremainunderpressureOutflowsfromdomesticequitymutualfundsandforeignsalesofUSstockshasintensifiedsinceJune2002(2)(2)NedDavisResearchInc.,September2002RecentEquityandFixedIncomeReturns(ForPeriodsEnded10/31/2002)Source:Lehman,Standard&PoorsCreditMarketUnderStressUnprecedentednumbersofdistressedcredits(“FallenAngels”areinvestmentgradecreditsthathavebeendowngradedtohighyield)$115billionFallenAngelsYTDthroughOctober2002Since2001defaultrateshaveexceeded1991highs"Defaultrateshavebeenrisingcontinuouslysince1999.IthasbeenlikeacreditrecessionforseveralyearsandIexpectittocontinueuntildefaultratesclearlyhavepeaked.”EdwardAltman,Ph.D.NYUSternSchoolofBusiness2001experiencedthemosteverChapter11filingswith170andpre-petitionliabilitiesof$230billionFirsthalfof2002had74filingstotaling$130billionSinceJune1997aseriesoffinancialcriseshaveresultedinhugevolatilityinandwideningofcreditspreads;thishasproducedsustainednegativeexcessreturnsincorporateissuesMoody’sdowngrade/upgraderatiorosefrom1.4in1998to4.1Moody’syear-to-yeardefaultsrosefrom1.3%in1998to10.53%inJune2002andareat9.2%forSeptember2002Source:Lehman,Moody’s,EdwardAltmanLiquidityCrisisCreditcontractioninbanklendingandcommercialpaperiscausinga“liquiditycrisis”,reversingtrendforlast5yearsof20%annualexpansionBanklendingiscurrently15%lowerthanlastJulyNon-financialCPhascontracted47.7%toalowof$179.5billioninJune2002fromhighof$343.3billioninDecember2000Financialleverage(ratioofcurrentdebttototalmarketcapitalization)ofcorporationsincreasedin2002to26.6%(on$4.5trillion),thehighestlevelsincethe1990-91recessionSource:LehmanHistoricalLowsForInterestRatesAggressiveFedeasingwithFedFundsat1.25%sinceNovember6,2002cutof50bpsTheresultingyieldcurveisthesteepestsinceFall1992Ratesat4-decadelows10-yearTreasuryNoteyieldof3.57%onOctober9thwasata44-yearlowAsofNovember11,2002the10-yearhasrisen58bpsfromthislowHistoricallylowratesledtoanothermortgagerefinancingwavewhichissupportingconsumerspendingExpectationisforinterestratestostaylowthisyear,risingnextyearastheyieldcurvetoflattenfromtheshortendSource:BloombergUPDATEUncertaintyofEconomicRecoveryBlueChipconsensusGDPgrowthisforecastat1.6%inQ4-2002and3.3%in2003.ConcernsthatdeclinesinequitymarketsandfinancialwealthcouldreduceconsumerspendingandeconomicgrowthContinuedconcern:GeopoliticalriskmaydisruptrecoverySource:BlueChipConsensusForecastInvestmentGradeCorporateCumulativeExcessReturnsPeriodofNarrowingCorporateSpreadsASeriesofFinancialCrisesWorldcomEnronAsiaCrisisRussiaCollapse,LTCMTechnologyBubbleCollapsesSource:LehmanCorporateBondValuationsAnythingButTelecomandPipelines!(FromDecember31,2001throughSeptember30,2002)AvoidingCreditDisastersandDefaultsisEssentialSource:Lehman(2002YTDthroughOctober31,2002)Thefirsttenmonthsof2002sawthelargestnumberofFallenAngels(InvestmentgradecreditsthathavebeendowngradedtoHighYield)inhistory(245totaling$115.4Billion).NiagaraMohawkTelecommunications,TCIComm,ITTUSWestCapital,Columbia/HCAWasteManagement,RiteAidXerox,Conseco,FinovaEnron,Calpine,JCPenney,PG&E,Lucent,Mirant,S.CalEdison,DeltaAirlines,KMartWorldcom,Qwest,Tyco,WilliamsCo.,GeorgiaPacific,USWestComm.,AT&TCanada,Dynegy,Nortel,Gap,GoodyearTop50FallenAngelsfrom1995-2002YTDWorldCom’s$22.8BilliontotalpublicdebtranksaslargestfallenangelQwest’s$14.4BillionissecondTyco’s$8.4BillionisthirdWilliams’$8.0BillionisfourthEnron’s$6.8BillionissixthGeorgia-Pacific’s$5.7Billionisinthetop10May2002willberecalledforarecord$42.8BillionoffallenangeldebtmovingintohighyieldJuly2002wasnextlargestat$22.8BillionCumulative$115Billioninprincipaloffallenangelsin2002YTDisrecordhighSource:Lehman(2002YTDthroughOctober31,2002)*IndexExposure--Actualbalancesheetexposuremaybehigher.*CreditRiskManagementisCriticaltoPerformanceHighYieldCorporates:IndexReturnsandDefaultRates(From1980throughSeptember30,2002)Source:LehmanHighYieldIndex1983-2002,*-7.63%ReturnisYTDthroughSeptember30,2002,CreditSuisseFirstBoston(CSFB)Returnsfor1980-1982,Moody’sDefaultRates1983-2002,*9.2%DefaultRateisforannualperiodfromOctober2001-September2002Mostyearsofpeakdefaultratesorfollowingyeararealsoyearsofhighreturns:1982,1986,1991and1995HighYieldSpreadsByCreditQuality(FromJanuary31,1990ThroughSeptember30,2002)Source:CreditSuisseFirstBoston(CSFB)ParadigmShiftinFallenAngelsOver20%oftheLehmanHighYieldIndexisnowcomprisedofformerinvestmentgradecredits.Returnsfellmorerapidlythaneverin2001-2002,sothepunishmentforowningadistressedcreditwassevere.Goodcreditdefenseandindex-likeperformancemadeforgreatperformanceLossesinInvestmentGradeBondsOccurinMonthsPriortoDowngradesLossofvalueduetoadowngradeoccursoverafewpriormonths.Dependingontheinitialcreditqualitylossescouldstretchover2monthsforAAA-AAandupto8monthsforBAAThevariabilityofthemagnitudeoftheloss(i.e.,Standarddeviation)isverysignificantAverageMonthlyUnderperformanceDuetoDowngrade8/88–12/01Source:Lehman #distressed24-month“VintageYear”issuesexcessreturnvs.UST 19905028.28%19911440.94%...19982919.33%19991010.69%20001398.35%Yearsprior200125016.56%--------------------------------------------------------200154-23.08%YTDJun200268-24.21%Yearssince2001122-23.71%AllYears3723.35% Source:LehmanSubsequentExcessReturns(vs.UST)ofinvestment-gradebondsafterdistress**Since2001LongTermRelative*PerformanceSubsequenttoDistresswasNegativeforInvestmentGradeBondsConsistentlypositiveexcessreturnssubsequenttodistressbefore2001---------------------Since2001longhorizonexcessreturnsfordistressedbondshavebeennegativebecauseofthecreditrecessionresultingfromaliquiditycrisis*RelativetoTreasuries**Lehmandefinesadistressedinvestment-gradebondas…RatedBaa3orhigher;Fixedcoupon;OAStoUSTreasuriesof400bpormore;andDollarprice<80%ofpar.Absolutevs.RelativeRisk:ADebateAdesiretolimitabsoluteriskhasledtoincreasedtrackingerrorforcreditdefensiveplayersthathavelimitedissuerexposures.IndexissuerconsiderationsShouldindicesrepresenttheactiveinvestableuniverseofthefewactiveissuesavailable?Orshouldindexproviderskeeplargenumbersofilliquidissues?Shouldindicescapsthemaxpercentageforanindividualissuer?Shouldlimitsbeplacedontheamountoutstandingforcurrentlydominantcredits?FallenAngelscompriseover20%ofLehmanHighYieldIndexRiskLimitsDivideinvestmentgradecorporatesintogroupsbyquality(AAA,AA,A,BBB),bysectors(orevensubsectors),andbyduration(0–2,3-5,6–10,10+)Highyield:diversify,diversify,diversifyClassic:EstablishlimitsbygroupsandbyspecificissuersoverallContemporary:UseacombinationoftrackingerrorandabsolutelimitsQuantitativeCreditRiskMetricsSpreadOASOASvolatilitySpreaddurationSwapspreaddurationReturnExcessreturnVariance/CovarianceofSpreadsorExcessReturnsIntegrateswellwithMarketRiskSpreadscanbedifficulttomeasureduringperiodsofilliquidityDefaultCDSCDSvolatilityDefaultProbabilityLossFrequencyLossGivenDefaultTransitionProbabilityMatrixVariance/CovarianceofSpreadsCreditVaRDifficulttoestimateduringperiodsofsparsedefaultsQuantititativeCreditMeasuresMoody’sKMVEDFsMoody’sRiskCalcPDsCreditSights’BondScoreCREsCSFBCreditRisk+McKinseyCrPortViewRiskMetricsCreditMetrics/CreditGradesStandard&Poor’sModelComparisonModelComparisonQuantititativeDiversificationProductsDefaultrelatedMoody’sKMVCreditGradesGiffordFongAssociatesSpread/ReturnbasedLehmanPOINTBarraTotalRiskCreditRiskDiversificationbySectorandRatingCreditdiversificationacrosssectorscanreduceportfoliovolatilityfromconcentrationriskforcreditsthathaveahigherprobabilityofbecomingdistressedorcanexperiencehighervolatility-thusreducingthestandarddeviationofreturnsSystematicvs.IdiosyncraticRiskContagionriskhashammeredcertainsectorswheretherehavebeenconsiderablebankruptcyfilingsand“fallenangels”;thesesectorsareslowlybecomingmoreattractiveHistoricallyfixedincomehasalowprobabilityoflossofprincipalCreditdifferencesresultindiversificationbenefitsFinancialIndustrialTelecomEnergyCreditDiversificationDowngradeRiskvs.OtherNon-SystematicRiskDowngradeonlyidiosyncraticsizeratiofordifferentratings:Aa-Aaa:A:Baa=9:4:1Downgradediversifyrequires9timesmorelowgradeBaatohighgradeAaaIdiosyncraticriskasstable-ratedbondsexperience“natural”spreadvolatilityTotalidiosyncraticrisklessdifferentiatedbyqualitythandowngraderiskaloneasindicatedbysizeratiofordifferentqualityratings:Aa-Aaa:A:Baa=4:3:1Diversificationoftotalidiosyncraticriskrequiresonly4timesasmanyBaacredittoAaacreditsSource:Lehman,LevDynkinAug14,2002,PRMIANewFrontiersinCreditRisk)DiversificationBalanceBalanceminimizingtrackingerrorvs.maximizingreturnorriskadjustedreturnToomuchdiversificationcostsperformanceDecreasessecurityselectionreturnfrompurchaseofcheaperbondsSufficientDiversification:ConclusionsOptimalsizeratiotominimizeriskofunderperformanceduetodowngradesforAaa/Aa,AandBaaportfoliois9:4:1(was7:3:1priorto2001)OptimalsizeratiotominimizeriskofunderperformanceduetonaturalspreadvolatilityforAaa/Aa,AandBaaportfoliois4:3:1Thechangesince2000wasnotduetochangeintransitionprobabilities,butduetoreturnseverityof2001downgrades.MinimizetheimpactthroughdiversificationinadditiontousingfundamentalanalysistoavoidselectingfuturefallenangelsanddefaultsSource:LehmanConclusions:RiskManagementOrientedPortfolioConstructionProcessBalancefundamentalcreditanalysiswithquantitativemeasures,relativeanddefensivecreditalertsMonitorabsoluteandrelativeissuerexposure,duration,convexity,spreaddurationandyieldcurveexposureIdentifymanysmallselectiverisksviasecuritylevelspread,portfolioscenarioandtrackingerroranalysesCreditdefense:MonitorchangesusingleadingindicatorslikeCDSdataandCreditRiskdefaultmodelslikeEdAltman’sZ-score,Merton/Moody’sKMVorhybridslikeCreditSights’BondScore