Day One

Analytic Overview

This section provides a structured framework of analysis highlighting early warning signals of distress and recurring themes in troubled credits.

Signs of distress

• Common themes in troubled financial institutions: excessive growth, over-concentration, volatile earnings sources, asset and liability mismatches, dependence on unstable funding
• Symptoms of a company's deteriorating credit standing: financial, non-financial and market indicators

Structured analytic approach

• Four step approach to focus on key issues: purpose, payback, risks and structure
• Purpose of the exposure and sources of payback: importance of refinancing in financial institutions, challenges to downsizing assets and availability of external support
• Risks to repayment: Identify the key macro, sector and company specific business and financial risks which might jeopardise repayment
• Structure: conclude on appropriateness of the facilities, assess the level of protection and critique the pricing to assess the risk: return

Operating Environment

This section will focus on key macroeconomic and sector trends, which are likely to erode creditworthiness, identifying potential areas of stress going forward.

• Systemic risks within a financial system: macro variables, competitive pressures, shadow banking system, quality of regulation and supervision
• Support for the banking system: too big to fail or too big to rescue?
• Origins of the credit crunch: sub-prime, structured finance (MBS, CDO, SIVs and ABCP), leveraged loans, dependence on interbank and etc
• Key market risks: including funding problems in the Eurozone and other countries, commercial real estate exposures in Europe and the US
• Potential impacts of forthcoming regulatory changes: Basel III, Dodd-Frank

Management and Shareholders

This section will focus on comparing management responses to a challenged sector.

• Companies in crisis: recognizing weak management and lack of integrity
• Risk management challenges: liquidity, reputation, operational risk
• Disclosure and corporate governance concerns
• Inter-group support: ability of a stressed parent company to support subsidiaries

Day Two

Business Risk

This section will focus on companies with challenged business models and companies in crisis.

• Credit risk: asset quality in the loan book; excessive growth and concentrations, hidden impaired loans; using surveillance reports to anticipate credit risk problems
• Market risk: stress and back testing VaR indicators, acceptable levels of exposure to structural interest rate and FX risk
• Derivatives: hidden credit and market risks; appropriate exposure levels
• Performance risk: assessing earnings volatility

Financial Risk

This section will focus on the stability of a company's funding structure and the ability to withstand solvency and liquidity crises.

• Assessing the diversity and stability of funding sources: refinancing risk: quantifying liquidity and financial flexibility
• Asset and liability management concerns: FX, interest rate and maturity mismatches
• Liquidity risk management: managing and stress testing transaction and funding stability
• Securitization vehicles: liquidity exposure to conduits, servicing rights and other residual interests, sub-prime risks
• Double leverage: challenges of a leveraged holding company
• Solvency: stress testing quality and adequacy of capital to withstand write-downs