Sovereign Credit Risk
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Uncover best practice to successfully build your own Financial Institution rating tool
This course forms Module 2 of the Financial Institutions & Sovereign Credit Masterclass
9:00 am - 9:15 am Welcome and introduction
A global overview about current ratings and their relevant peer groups, as well as international rating agency criteria for various sectors.
9:15 am - 12:30 pm Session 1: Standard & Poor’s sovereign rating criteria:
Sovereign indicative rating level
Institutional and economic profile
- Institutional assessment
- Economic assessment
Flexibility and performance profile
- External assessment
- Fiscal assessment
- Monetary assessment
Foreign-currency vs. local-currency sovereign rating
After completing Session 1, participants will be able to analyse a sovereign’s institutional effectiveness, considering factors such as predictability of policymaking, external security risks, etc.
The economic assessment will help participants to identify the key drivers for economic development which is often the long-term basis for sovereign creditworthiness. The focus is identifying potential economic volatility or concentration, stemming e.g. from above-average reliance on receipts from commodities.
Participants will further be able to analyse the financial flexibility of sovereigns, taking into account factors such as the sovereign’s external position, which gives participants the ability to inspect the sovereign´s currency status and its external liquidity, relative to the rest of the world.
The second important part of assessing a sovereign’s financial flexibility is the fiscal assessment, meaning assessing the effect of an increasing/decreasing general government debt burden and relate it to the country´s respective funding and debt structure, contingent liabilities, etc. The session will also explain the difference between the various debt definitions, such as net external debt burden and general government debt, including identifying their sustainability and early warning signs.
After completing the session, participants will further be able to explain the monetary assessment - which is the third part of assessing a sovereign’s financial flexibility - including its factors such as the exchange rate regime, credibility of monetary policy and connect it to a country´s development level of financial system and capital markets.
Finally, the participants will be able to differentiate between foreign-currency and local-currency debt in order to apply credit risk correctly to a specific debt instrument and learn what they should and what they could incorporate in their internal rating tools.
12:30 pm - 1:30 pm Lunch
1:30 pm - 3:30 pm Session 2: Other relevant methodologies
- Guarantee criteria
- Rating Partially Guaranteed Sovereign Debt
- Banking Industry Country Risk Assessment Methodology And Assumptions
- Bank system support
- Bank Capital Methodology And Assumptions
- Rating Implications Of Exchange Offers And Similar Restructurings
After completing session 2, participants will be able to compare different forms of guarantees and interpret them in the light of a sovereign’s banking system. Participants will also be able to relate rating implications of exchange offers and make use of the information for their internal purposes, i.e. taking into account various constellations of credit enhancement or overlooked credit risks.
3:30 pm - 4:00 pm Recap
9:00 am - 9:45 am Welcome and Recap
9:45 am - 11:45 am Session 3: Standard & Poor’s rating criteria for:
- Multilateral Lending Institutions And Other Supranational Institutions Ratings Methodology
- Government-Related Entity (GRE) methodology
- Rating Above The Sovereign criteria
- Use of Credit Watch and Outlook
After completing session 3, participants will be able to utilize rating methodologies of different sectors, including supranational institutions and government-related entities and use them consistently together with the rating agencies´ rating above the sovereign criteria.
Participants can also select to deep-dive into the use of credit watch and outlook and discuss how to incorporate such frameworks into their own rating tools and credit analyses papers.
11:45 am – 12:30 pm Start of case studies
12:30 pm – 1:30 pm Lunch
1:30 pm – 3:30 pm Case study session: Standard & Poor’s
Analyse S&P rating reports
- Recognize the most important rating factors and methodologies instantly.
- Seek in-depth information on creditworthiness which is not described in the report.
- Conceive the potential rating agency’s motive for not mentioning individual rating factors profoundly.
- Identify additional information in the reports, which is not predominantly rating relevant.
- Comprehend the rating reports between the lines, i.e. to discover not obvious information on sub-factors of creditworthiness.
- Classify rating factors that could go up or down in the next 12–24 months.
- Find rating agencies’ mistakes and ambiguities in the reports.
Discuss relevant approaches of analysis that are useful to incorporate into a bank’s own internal rating tool.
After completing the case study session, participants will be able to retrieve the information in the latest rating reports and examine how S&P assesses credit risk. The participants will discover which information the rating agency shares, and which information potentially remains encrypted, including categorizing the relevant rating factors and qualitative adjustments. This will lead participants to form their own opinions about credit risk on selected sovereigns and enable them to uncover the dos and don’ts when analysing sovereigns in their internal rating tools.
3:30 pm - 4:00 pm Session 4
Recap of the relevant sovereign rating methodologies
- Comprehend how rating agencies apply their own methodologies
- Discuss the methodologies and compare them with the participants’ internal rating tools to assess counterparty creditworthiness.
After completing session 4, participants will have a full view on in-depth analyses, taking into account various sovereign rating methodologies and will be able to use concrete learnings in order to enhance the quality of their internal rating tools (models). Participants will discuss how to use the know-how for their internal purposes of assessing creditworthiness, and which assessment-elements and rating factors make sense to acquire for each own’s analytical purposes.
This course identifies relevant approaches of credit analysis that are useful to incorporate in a financial institution’s own internal rating tool. Further, this enables participants to deepen their expertise about credit risk for global banks and sovereign obligors.
Covering Standard & Poor’s, Fitch and Moody’s methodologies helps participants identifying general trends on each of the entities’ rating factors and qualitative adjustments. Through detailed case studies participants will be able to analyse how rating agencies apply their own criteria, and especially which questions remain unanswered in public rating reports. Further participants will develop skills to read between the lines in rating reports in order to fully being able to form their own informed opinions about credit risk of financial institutions of their interest.
The understanding of these methodologies wiill be transformed into practical tips about how internal ratings tools should assess credit risk and which factors need to be taken into account, and to what extent, when analysing ratings. The seminar further discusses also the availability of validated data, so that participants instantly know where to find the right underling information for each of the rating factors, taking into account qualitative as well as quantitative data.
Overall this seminar leads participants to keep track of probability of default and helps to conceive an informed opinion about counterparties’ creditworthiness. This again, helps improve a financial institution’s own internal rating tool, make it more robust and exceptionally forward-looking.
- Analyse sovereign debt issuance in today’s capital markets
- Interpret macroeconomic and other quantitative data which impact sovereign credit ratings
- Integrate qualitative risk factors into the risk assessment
- Measure the likely impact of sovereign credit rating on the ealuation of banking system support
- Differentiate the rating methodologies for supranational agencies from those of sovereign obligors
- Appreciate how the rating agencies assess risks
- Discuss the UN principles on distressed sovereign debt recovery and legal process
- Define situations of default with respect to international (external) sovereign debt and domestic sovereign debt
- State how investors can predict improvements and deteriorations in sovereign credit quality