Advanced Credit Risk Analysis and Management index

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AdvancedCreditRiskAnalysisandManagement.CibyJoseph.©2013CibyJoseph.Published2013byJohnWiley&Sons,Ltd.Index5CsModel24–25ITA110–1125ForcesModel,Porter67–71,73–7projectfinance200workingcapital208–210,219,220,234ABSseeAssetBackedSecuritiesbankruptcy9–10,20,269accountinganalysis105–107banks/bankingAccountingRateofReturn(ARR)189commercialbanks11activecreditportfoliomanagement242–243confidenceissues383–384activityratios126–128CRAessentials17AdjustableRateMortgages(ARMs)253creditbubbles387–388AIG329–330,390,396,400creditcreation382–383AirIndia90guarantees368Altman,EdwardI.135–136roleofbanks382America’sHomeownershipChallenge393,397ultimateuseofcredit384–385ARMsseeAdjustableRateMortgagesWCproblems229ARRseeAccountingRateofReturnseealsoCreditCrisis2008;individualbanksAssetBackedSecurities(ABS)319bargainingpower67,69–70,75–76assetsBaselAccords285–302creditassettrading317–322,409–410BaselI286–288financing233BaselII288–296liquidation231BaselIII296–299managementratios126–128capitaladequacy300–302PScorrelations312–313KellyCriterion300–302sales/marketing244BaselCommitteeonBankingSupervisiontradablecreditassets409–410(BCBS)assignmentbasis,syndicatedloans318285assignmentofdebtors369BaselI286–288‘atsight’lettersofcredit233capital286auditedfinancialstatements101–102criticisms287–288averagedepreciation128RWA286aviationindustry70–71,79,89,90BaselII288–296capitaladequacy293–294balanceofpayments51–52componentsdiagram289balancesheets103–104creditriskapproaches289–293casestudy136–138criticisms295–296covenants374–375marketdiscipline289CSA108–109minimumcapitalrequirements288 416IndexBaselII(Continued)Porter’sModel67,69–70,76RWA293–294protection326,330supervisoryreview288–289threepillars288–289capitalBaselIII296–299BaselI286componentsdiagram297BaselII288creditriskmeasurement297–298costof340futurecrises299creditportfolios245–246BCBSseeBaselCommitteeonBankingLTCM388–390Supervisionminimumrequirements288BearStearns390,395–396,402RAROC349–351,363–364BEPseebreak-evenpointregulatory246,277–278beta,portfolio263ROCAR349–351billfinance232ROCE125–126,134–135BlackScholesoptionmodelling170RORAC349–351Black–CoxModel172SOCE123,134–135break-evenpoint(BEP)133,187standards298–299bubblesseecreditbubblesstructure142businesscategories/sectors,NI49seealsoeconomiccapital;workingcapitalbusinessconfidence,NI49capitaladequacy265businesscontrol8–9BaselI286businesscredit7BaselII293–294businesscycles43–46creditlossdistribution275creditrisk46KellyCriterion300–302industryrisks66–67cashcycle213–215peaks45cashdeposits367recession44–45cashflowsrecovery45casestudy142studybenefits45–46covenants374troughs45projectfinance187–188,199–200UScyclediagram44ratios121–122businessrisks37–38workingcapital223–225,234businessstrategyanalysis84–90CashFlowStatements(CFSs)105consolidation87cashratio116contraction86CDLNseeCreditDerivativeLinkedNotescostcontrol88CDOseeCollateralizedDebtObligationscostleadership85CDSseeCreditDefaultSwapsdifferentiation86centralbanks286diversification87CFSsseeCashFlowStatementsEmiratesAirlines89charges,unregistered369entity-levelrisks84–90COseeCreditOptionsexpansion88collateral367–377focusstrategy88CRAessentials24marketpenetration86facilitygrades365mergers/takeovers87needforCRA21newmarkets87CollateralizedDebtObligations(CDO)319–321strategypitfalls89–90CreditCrisis2008321,400–401,402,404businessvolume219–222,223downfall321buyersmajorparties320bargainingpower67,69–70,76ratingagencies400–401creditrisk328typicalstructure320 Index417collateralrisk260convenienceof8commercialbanks11creation13–14commission344default9CommonSizingAnalysis(CSA)107–110demerits9–10competitiondevelopmentinstitutions11increaseandCRA21historicalaspects4intensity75institutions11,12oilcasestudy75markets6–7Porter’sModel67,68,75meaningof4–5profitability67,68merits7–9competitoranalysis71–77overspending10concentration258–262profitability9collateralrisk260publicdebtmarket11–12correlationrisks262reputation9exposurerisk259riskstudy12–13foreigncurrency259–260roleof6fundingrisk261–262socio-economicadvantages9geographicalregions259suppliers11–12industry/sector258–259taxplanning8maturityrisks260–261termlendinginstitutions11nameconcentration259tradecredit11,12portfoliorisks258–262ultimateusage384–385sector/industry258–259wealthcreation7–8,10–11conditionalprobability315creditassettrading317–322conflict,organizational249–251distresseddebt321–322consumption,private47distressedreceivables322conversioncosts,WC222factoring322corporategovernance94riskevaluation409–410corporateguarantees369–370securitization318–321correlationrisks262syndicatedloans317–318costofcapital340creditbubbles385–388costcontrol88consequences387–388costleadership85explosionof387–388costpluspricing353types368Cost-Volume-Profit(CVP)ratios133–134UShousing396–398,401–403,404–406counterparties307creditcreation382–383countryrisk341creditcrises381–410covenants367,373–3772008CreditCrisis321,329–330,393–410financial373–376banks,roleof382–385majorcategories373bubbles385–388,396–398,401–403non-financial376–377Greeksovereigncrisis329–330WCriskmitigants230LTCM388–390CoxseeBlack–CoxModelroadtocrisis381–391CRseeCurrentRatioCreditCrisis2008393–410CRAseecreditriskanalysis1929vs.2009406–407credit3–142007events402advantages/disadvantages7–112008events402–403bankruptcy9–102009events403,406–407basics3–14CDO321,400–401,402,404businesscontrol8–9CDS329–330commercialbanks11economiccrisis404–406 418IndexCreditCrisis(Continued)criticalityofrisks242housing396–398,401–402,404–406equityportfolios241LehmanBrothers393,400,403–404fundamentals241–251lessonstolearn407–410liquidityoptimization244OTCderivatives398–400,408–409managementstrategies246–247primelending393–394,394–395,397organizationalconflict249–251ratingagencies400–401portfolioanalysis247–249sectorinterconnections404–406riskreduction243securitization394–396riskvs.return249sub-primelending393–394,394–395,397,sectoralinsights244–245403–404seealsoportfoliorisksUS393–410creditquality247,314–315creditdecisions165creditratings161–173CreditDefaultSwaps(CDS)324–330benefitsof163criticisms329–330EIIFevaluation161–163flowsdiagram326example162–163insurance326–327external166–169,279,394,400–401,407OTCderivatives398–399gradingrisk161–163securitization395–396internal166–169sovereignCDS329reliability167–168speculation327typesdiagram167usesof327–329creditriskanalysis(CRA)15–25CreditDerivativeLinkedNotes(CDLN)challenges22–24333–334creditrisk15–17creditderivatives323–334elements24–25CDS324–330,395–396futurepredictability23–24CO332historicalprogress19CSO333needfor19–22futureaspects334creditriskevaluation409–410linkedstructures333–334creditriskmanagement27–34majorcategories325context28meaningof323–324culture29OTCmarkets334financialintermediaries31–33TRswaps330–332non-financialfirms31creditevents324objectives28–29credit-ledprosperity381–382riskappetite30creditlossdistribution274–276strategicposition27–28benefits275–276structure29casestudy279–282typesofrisk27characteristics275creditriskmodels315economiccapital278creditriskpremium337–339,345creditmarkets6–7creditriskpricingmodel344–345CreditMetrics172CreditSpreadOptions(CSO)333CreditOptions(CO)332CreditValueAdjustment(CVA)297–298CreditorsPaymentPeriod210–212creditworthiness12–13,190–192,393–394creditportfolios241–251CSAseeCommonSizingAnalysisactivemanagement242–243CSOseeCreditSpreadOptionsassetsales/marketing244cultureofmanagement29,92–93benefitsofstudy242–247currentassets207,208capitallinkstorisk245–246currentliabilities207,208creditquality247CurrentRatio(CR)115–116,117,220–221 Index419CVAseeCreditValueAdjustmentEBITDAleverageratio119CVPseeCost-Volume-Profitratioseconomiccapital276–279creditportfolios246datareliability23measurement278–279debt,distressed321–322optimization279Debt/EquityRatio(DER)118profitability276debtorscollectionperiod/ratio127,210–212,219regulatorycapital277–278DebtServiceCoverageRatio(DSCR)119,191solvency276debttrap,Japan10economicconditions46–50decisions,PD165exports48default9,262,269–270governmentspending47–48seealsoCreditDefaultSwaps;Exposureatimports48Default;LossGivenDefault;probabilityofinvestment48defaultNI47,48–50deflation50–51,388,406privateconsumption47demographicfactors54–55economiccrises404–406deposits367economicprofit(EP)351–353DERseeDebt/EquityRatioeconomicworth189–190derivativesseecreditderivatives;economiesofscale85Over-The-CounterderivativesEDRPseeExternalDebtRepaymentPeriodratiodevelopmentinstitutions11EIIFseeExternal,Industry,InternalandFinancialdifferentiation86risksdisintermediation22ELseeExpectedLossdistresseddebt/receivables321–322EmiratesAirlines70–71,89diversifiablerisk255–258encapsulatedratios114–115,134–143example257–258analyticalratiochart134majorrisksdiagram256casestudy140portfoliorisks255–258Dupontmodel134–135,140systematicrisk256predictivepower135–136diversification305–316entity-levelrisks79–98businessstrategyanalysis87businessstrategies81,84–90CDS327–328casestudy95–97counterpartylimits307contextofrisk81diversifiablerisk255–258EIIF147–149,161–163,184industrylimits306–307goals/objectives81modernapproach309–315identification82–83PS309–314managementanalysis90–94regionalrestrictions307–308projectfinance184riskmodelcorrelations315riskmanagement81sizeofcustomer308SWOTanalysis83–84traditionalapproach305–309typeslist94–95diversionrisk227understandingthebusiness80–81dividendcashcoverratio122valuecreationactivities80dividendandequityratios120–121seealsofirm-levelrisksDSCRseeDebtServiceCoverageRatioenvironmentissues55–56Dupontmodel134–135,140EPseeeconomicprofitequityfundingofassetsratio118–119EADseeExposureatDefaultequityportfolios241EarlyWarningIndicators57–58exchangerates51–52earthquakes56exchange-tradedderivatives398EastIndiaCompany4exitstrategies342 420IndexExpectedLoss(EL)271–272,274,282,338EIIF147–149,161–163,184exports48encapsulatedratios114–115,134–143ExposureatDefault(EAD)271,291–293financialanalysis103–105,140exposurerisk259financialstatements99–103ExternalDebtRepaymentPeriod(EDRP)ratioITA110–113122listofrisks/mitigants157–158externalfinanceratios120obligorcreditrisk38,39–41External,Industry,InternalandFinancial(EIIF)operationalratios114,123–134risks147–149,161–163,183–184projectfinance184externalratings166–169,279,394,400–401,407ratioanalysis113–143externalrisks43–59financialstatements99–103balanceofpayments51–52businesscontextdiagram100businesscycle43–46historicalstatements102–103demographicfactors54–55quality/quantity101–102economicconditions46–50financialstudy187–192EIIF147–149,161–163,183–184cashflowforecasts187–188environmentissues55–56projectfinance187–192exchangerates51–52financingworkingcapital217–218,extremeevents56–57232–234fiscalpolicy53firm-levelrisks147–159,265–283industryrisks63defaultrisk269–270inflation/deflation50–51EL271internationaldevelopments56listofrisks/mitigants155–158listofrisks/mitigants155–156migrationrisk266–267monetarypolicy53–54provisioning272–273monitoring57–58seealsoentity-levelrisks;obligorcreditriskpoliticaldevelopments52–53fiscalpolicy53projectfinance183seealsofinancial...regulatoryframework55Fitchratingagency166–167technology55FiveForcesModel,Porter67–71,73–77fixedassets/capitaltototalassetsratio128facilitygrades364–366fixedassetsutilizationratio123–124factoring322fixedcapital216fees344fixedinterestrates342–343FIseefinancialinstitutionsforeigncurrencyconcentration259–260financecoststosalesratio120fundingrisk261–262financialanalysis103–105,140financialcovenants373–376GearingRatio(GR)117–118financialcrisesseecreditcrisesgeographicalconcentration259financialexpertise92Glass–SteagallAct1933,US409financialinstitutions(FI)11,12,17,383–384gold368seealsobanks/bankinggoods368financialintermediaries31–33governmentspending47–48financialleverage130–132governmentsupportforindustry65–66financialmanagement228GRseeGearingRatiofinancialpolicy222GreaterFoolTheory4financialratiosseesolvencyratiosGreeksovereigncreditcrisis329–330financialrisks99–145gridpricing354–355accountinganalysis105–107grossprofitmargin124analyticaltools105–115grossprofitratio124CSA107–110growth121,124,381–382 Index421growthpotentialratio121mitigants/risktypes150–154,155–159guarantees193,368,369–370monitoringrisk154–155relevanceof147HalifaxBankofScotland(HBOS)253risktypes/mitigants150–154,155–159hedgefunds18significantrisks148–149housing396–398,401–402,404–406interestbearingdebtfundingofassetsratio119seealsomortgages;propertyinterestcashcoverratio121hypothecation372interestcoverratio120interestrates342–346IBM90–91example343–344Icelandicbanks403fixed/variable342–343imports48IRS343–344incomestatements104–105,108–110,112–113PLR345–346seealsoprofitandlossaccountspricingstructures342–344IndexedTrendAnalysis(ITA)110–113InterestRateSwaps(IRS)343–344industryconcentration258–259InternalRateofReturn(IRR)190industrydiversification306–307internalratings166–169industryrisks61–77Internal-Ratings-Based(IRB)approachesbusinesscycles66–67291–295competitoranalysis71–77internalrisks147–149,161–163,184driversofindustry63–64seealsoentity-levelrisksEIIF147–149,161–163,183–184internationaldevelopments56externalrisks63interviews82–83governmentsupport65–66investment48industryclassification62–63IRBseeInternal-Ratings-Basedapproachlifecyclemodel64–65IRRseeInternalRateofReturnlistofrisks/mitigants156IRSseeInterestRateSwapsobligorindustry/market61–63ITAseeIndexedTrendAnalysispeergroupanalysis71–77Japan10permanencefactors65jointprobabilities315productionfactors66profitability67–71KellyCriterion300–302projectfinance183–184KMVModel172sectors/segments61–62specificrisk63land367–368types63–64LCseeLettersofCreditinflationleanmanagementsystems222creditbubbles386LehmanBrothers390,393,400,403–404creditorloss5lendinginstitutions11externalrisks50–51seealsofinancialinstitutionspricingfactors342letterofawareness370WCrisks228LetterofComfort(LOC)370insuranceletterofnegativepledge370CDS326–327LettersofCredit(LC)232–233,368CRAessentials18leverageprojectfinance193BaselII295WCriskmitigants231BaselIII296–297,298–299intangiblesecurity369–370creditcrises388,407integratedviewofrisk147–159financial130–132identifyingrisk148–149pricingfactors340judgement147–148ratios128–133 422IndexLGDseeLossGivenDefaultstaffmorale93lien372topteamaspects91–92,93lifecycles,industry64–65,73seealsocreditriskmanagementLimitedLiabilityCompanies(LLCs)21manufacturing18,214–215limitedrecoursefinancing178marginofsafety134liquidationofassets231marketdevelopment83liquiditymarketdiscipline289BaselII295–299marketing/marketscasestudy142assets244creditportfolios244creditmarket6–7crises229–230,260–261OTCderivatives334maturityrisks260–261publicdebt11–12optimization244marketpenetration86ratios115–117marketpricing351WCriskimpact229–230marketsegments61–62liquidityriskmaturityrisks260–261BaselII295maximizationofwealth7–8CreditCrisis2008408mergers87pricingfactors341MerrillLynch402,403projectfinance186MertonModel169–172LLCRseeLoanLifeCoverRatiomigrationrisk266–269LLCsseeLimitedLiabilityCompaniesbenefitsofstudy269LoanLifeCoverRatio(LLCR)191example267LOCseeLetterofComfortfirm-levelrisks266–267LongTermCapitalManagement(LTCM)portfoliorisks268–269388–390,407–409mitigantsseeriskmitigantslongtermsolvencyratios117–119ModernPortfolioTheory309lossmonetarypolicies53–54EL271–272,274,282,338moneylaundering5highrisk41monitoringissues154–155,247,314needforCRA21MonteCarlosimulation274,280–281UL272,274,279,282Moody’sratingagency166–167seealsocreditlossdistributionmoraleofstaff93LossGivenDefault(LGD)270–271,274–275mortgages253,371,394–395,397BaselII291–295mutualfunds18creditriskpremium338facilitygrades364–366nakedCDS395–396securityandpricing362–363nameconcentration259LTCMseeLongTermCapitalManagementNationalIncome(NI)47,48–50negativepledges370managementanalysis90–94NetPresentValue(NPV)190,354–355bigprojects93–94netprofitmargin125corporategovernance94NetWorkingCapital(NWC)217–218,220,231culturalrigidity92–93NIseeNationalIncomedisharmony92non-financialcovenants376–377financialexpertise92non-financialfirms31internalcontrols93NonPerformingAssets21lackofskills92non-recoursefinancing178one-manrule91non-systematicriskseediversifiableriskownershipchanges92NorthernRock261,402responsestochange94notes,CDLN333–334 Index423NPVseeNetPresentValuepayoutratio120,121NWCseeNetWorkingCapitalPBITseeProfitbeforeInterestandTaxPDseeprobabilityofdefaultobligorpeercomparisons83creditrisk15,17,37–42peergroupanalysis71–77EL271performanceratios123–124industryof61–63permanenceofindustry65marketof61–63personalcredit7PD265–266PLCRseeProjectLifeCoverRatioobligorcreditrisk15,17,37–42pledges370,371classification37–38‘pointintime’ratings401fundamentalrisks37–42politicaldevelopments52–53risklevels39–41Porter’sFiveForcesModel67–71,73–77riskmatrix39–41portfolioanalysis247–249off-balancesheetdebt/transactions22,179portfoliobeta263oilindustry73–77portfolioPD265–266definition73portfoliorisks15,17,253–264,265entrybarriers73–74concentration258–262lifecycle73creditlossdistribution275–276structuralanalysis73–77defaultrisk270substituteproducts74–75diversifiablerisk255–258operatingcycles,WC213–214,232–233diversification309–315operatingleverage128–130EL271operatingprofitmargin(OPM)124–125,134–135majorrisks253–264operatingrisks(OR)37–38,39–41migrationrisk268–269operationalratios114,123–134portfoliobeta263assetmanagementratios126–128price/pricingfactors339–340CVPratios133–134provisioning273–274leverageratios128–133systematicrisk253–255performanceratios123–124seealsocreditportfoliosprofitabilityratios124–125PortfolioSelection(PS)Theory309–314OPMseeoperatingprofitmarginapplications310–314opportunities,SWOTanalysis84benefits310ORseeoperatingriskscomponentcorrelations312–313,314OTCseeOver-The-Countercomponentproportions313–314otherincometoPBITratio125criticisms310overdrafts234example311–312overheads341,345monitoringcorrelations314overspending10price/pricing337–348Over-The-Counter(OTC)derivativesbasics337–348BaselIII298casestudy346–348complexity399costpluspricing353CreditCrisis2008398–400,408–409creditriskmodel344–345markets334creditriskpremium337–339,345reasonsforpopularity399economicprofit351–353systemicrisk400factorstoconsider337–342overtrading225–227gridpricing354–355ownershipoffirm92marketdetermination351methods349–356participationbasis,syndicatedloans318NPV354–355paybackperiods189PrimeLendingRate345–346 424Indexprice/pricing(Continued)projectfinance177–205RANPV355casestudy194–202RORAC349–351creditrisks183–187security341,362–364creditworthiness190–192structure342–344,353–354distinctivefeatures177–178workingcapital222,223,231economicworth189–190primelending345–346,393–395,397financialstudy187–192PrimeLendingRate345–346financialviability186–187privateconsumption47negotiationelements178probabilities315partiesinvolved180–182probabilityofdefault(PD)161,163–166,phaserisks182–183169–173reasonsfor179–180asymmetrydiagram266riskmitigants192–194BaselII291–295typesoffinance178BaselIII298uniquerisks184–186benefitsofvalues165ProjectLifeCoverRatio(PLCR)191CDS325property367–368,386creditdecisions165prosperity,credit-led381–382creditlossdistribution274–275protectionbuyers/sellers323–324,326,330creditriskpremium337–339provisioning228,272–274example166,171prudence20gradingscale164PSseePortfolioSelectionTheoryMertonModel169–172publicdebtmarket11–12obligor265–266PDvalues165–166QRseeQuickRatioportfolio265–266qualitativeriskmitigants150–153structuralmodels169–172vs.quantitative153productionfactors66strategies151–152products30,67,69,74–75strengths150–151profitqualityissues101–102,247,314–315economic351–353quantitativeriskmitigants152–153studyofNI49questioning82–83profitability67–71QuickRatio(QR)116,117,220–221buyerbargainingpower67,69–70casestudy141RANPVseeRisk-AdjustedNPVpricingchallengesofCRA23RAROCseeRisk-AdjustedReturnOncompetition67,68Capitalcreditriskmanagement32–33ratingagencies166–167,394,400–401economiccapital276seealsoexternalratingsnewentrantthreat67,68–69ratios113–143overtrading227encapsulatedratios114–115,134–143Porter’sModel67–71financialcovenants375,377ratios124–125operationalratios114,123–134reduced9projectcasestudy200–201substituteproducts67,69solvencyratios113–122supplierbargainingpower67,70workingcapital127–128,136,210–212workingcapital223–225,227,228–229realizationofsecurity372–373ProfitbeforeInterestandTax(PBIT)8,125,recession44–45136seealsoCreditCrisis2008profitandlossstatements198,374recovery45seealsoincomestatementsregionaldiversification307–308 Index425regulatoryaspectsROAseeReturnonAssetscapital246,277–278ROCARseeReturnonCapitalAtRiskCreditCrisis2008409ROCEseeReturnonCapitalEmployedexternalrisks55ROEseeReturnonEquityreputation9ROIseeReturnonInvestmentrestrictivecovenants179RORAseeReturnonRiskAssetsrestructuring269RORACseeReturnonRisk-AdjustedCapitalretentionratio120RWAseeRiskWeightedAssetsreturn17,22,249seealsoTotalReturnSwapsS&PseeStandard&Poor’sratingagencyReturnonAssets(ROA)125salesReturnonCapitalAtRisk(ROCAR)349–351assets244ReturnonCapitalEmployed(ROCE)125–126,growth/declineratio123134–135ReturnonSales125ReturnonEquity(ROE)8,126SOCEratio123,134–135ReturnonInvestment(ROI)125–126,218workingcapitaltosalesratio128ReturnonRisk-AdjustedCapital(RORAC)SalestoOperatingCapitalEmployed(SOCE)349–351ratio123,134–135ReturnonRiskAssets(RORA)349–350SARSseeSevereAcuteRespiratorySyndromeReturnonSales125scarceresources179revenue,NI49scenarioanalysis192reviewseemonitoringissuesScholesseeBlackScholesoptionmodellingrisksectorsappetite30,394–395concentration258–259,262commontypes27CreditCrisis2008404–406creditriskstudy12–13creditportfolioinsights244–245identification82–83,148–149creditriskmanagement30management81,296industryrisks61–62matrix39–41NI49mitigants150–158,192–194,230–231,236pricingfactors340–341models24,315,408PScorrelations312–313reduction243securitization318–321andreturn22,249ABS319sensitivity293–294CDO319–321sharing179CDS395–396workingcapital225–230,236CreditCrisis2008394–396seealsoindividualtypes;integratedviewofratingagencies400riskriskappetite394–395Risk-AdjustedNPV(RANPV)pricing355security359–366,367–377Risk-AdjustedReturnonCapital(RAROC)attributes362349–351,363–364borrowers361–362riskmitigants150–158covenants373–377listofrisks/mitigants155–158creditors360–361projectfinance192–194facilitygrades364–366qualitative150–153intangible369–370quantitative152–153merits/demerits360–362selectionprinciples153–154methodsoftaking371–372typesdiagram150needfor359–360workingcapital230–231,236pricing341,362–364riskpricingseeprice/pricingrealization372–373RiskWeightedAssets(RWA)286–287,293–295riskmitigants152–153 426Indexsecurity(Continued)substituteproducts67,69,74–75systematic/unsystematicrisk364supplierstangible367–368bargainingpower67,70,75–76segments,market61–62credit11–12sellers,protection326,330Porter’sModel67,70,75–76sensitivityanalysis192,202workingcapital219settlementrisk15–16sustainablegrowthratio121SevereAcuteRespiratorySyndrome(SARS)56swaps330–332,343–344shares367SWOTanalysis83–84shortloans234syndicatedloans317–318shorttermdebtcashcoverratio121–122systematicrisk253–256simpledefault269consequences254–255simulation274,280–281creditriskcauses16–17sizeofcustomer308diversifiablerisk256skills92portfoliorisks253–255SOCEseeSalestoOperatingCapitalEmployedsecurity364ratiotriggers254socio-economicadvantage9systemicrisk400solvency113–122,276solvencyratios113–122takeovers87casestudy139tangiblesecurity367–368cashflowratios121–122targetmarkets30dividendandequityratios120–121tax8,180externalfinanceratios120‘technicaldefault’269liquidityratios115–117technology55longtermratios117–119tenorofproject180sovereignCDS329terminationpayments325–326sovereignrisk5termlendinginstitutions11specificrisk63terrorism53seealsodiversifiableriskthreats,SWOTanalysis84speculationTLseetotalleverageCDS327‘toobigtofail’institutions407–408creditbubbles385–386totalcreditportfolioriskequation255CreditCrisis2008395,397,400–401totalleverage(TL)132–133spending10,47–48TotalReturn(TR)swaps330–332sponsorship180,185tradablecreditassets317–322,409–410staffmorale93tradecredit11,12,127,317–322,409–410Standard&Poor’s(S&P)ratingagencytradecreditorspaymentperiod127166–167traders/trading18,317–322,409–410standardizedcreditriskapproach290–291transferofrisks152standards,minimumcredit30troughsinbusinesscycle45stockholdingperiod126–127,211–212,219stockandshares367ULseeUnexpectedLossStockTurnoverRatio210undiversifiableriskseesystematicriskstrengths83,150–151UnexpectedLoss(UL)272,274,279,structuralanalysis73–77282structuralmodels169–172unionism57,94structuredpricing353–354UnitedStates(US)44,393–410sub-portfolios248,268–269,270unregisteredcharges369sub-primelending393–394,394–395,397,unsystematicrisk16–17,364403–404USseeUnitedStates Index427valuecreation80financing217–218,232–234variableinterestrates342–343fixedcapital216impactsofrisks229–230WachoviaBank253management141,231warranties193mitigantsofrisks230–231,236WCseeworkingcapitalprice/pricing222,223,231WCtoSalesratio128,210–212profitability223–225,227,228–229WCtoTotalAssetsratio127–128,136,210,212projectfinance188,201weaknesses,SWOTanalysis83provisioninginadequacy228wealthcreation7–8,10–11ratios127–128,136,210–212workingcapital(WC)207–237reductionofcredit230balancesheets208–210,219,220,234risks225–230,236behaviour216–223tosalesratio128,210–212businessvolume219–222,223tototalassetsratio127–128,136,210,cancellationofcredit230212casestudy234–236tradeterms218–219,223cashflows223–225,234unforeseencontingencies229cycle207–208,212–216wrongwayrisk298definition207–208drivers217Z-ScoreModel135–143,161