Credit Risk & Management Through Derivatives PDF

26/11/2019 Credit risk and its management through derivative instruments 1 D. Lautier - UE 109 - 2018/19 1 Credit risk is present __________________________ It is the main _______________...

26/11/2019 Credit risk and its management through derivative instruments 1 D. Lautier - UE 109 - 2018/19 1 Credit risk is present __________________________ It is the main ________________________________ Measurement and management of credit risk have become increasingly important in the banking industry Development of _______________________________ D. Lautier - UE 109 - 2018/19 22 2 The major categories of risk Market risk: ___________________________________________ __________________________ Liquidity risk: ____________________________________________ - ____________ - _____________ Operational risk: ____________________________________________. Credit risk: ____________________________________________ D. Lautier - UE 109 - 2018/19 33 3 1  26/11/2019 The main sources of vulnerability to credit risk Macroeconomic risks - _________________________________________ - _________________________________________ Credit growth Valuation of credit risk (liquidity premium) The potential risk _______________________________ ________________________________________________ The growing ___________________________________ D. Lautier - UE 109 - 2018/19 44 4 Section 1. Credit risk: definition Section 2. Measure of credit risk Section 3. Credit derivatives D. Lautier - UE 109 - 2018/19 5 5 Section 1. Credit risk: definition and measurement 1.1. Introduction 1.2. The magnitude and extent of credit risk 1.3. Manifestations of credit risk 1.4. Exposure to credit risk 1.5. The assessment of credit risk D. Lautier - UE 109 - 2018/19 6 6 2  26/11/2019 1.1. Introduction 1.1.1. Credit risk and interest rate 1.1.2. Economic principles related to credit risk D. Lautier - UE 109 - 2018/19 77 7 1.1.1. Credit risk and interest rate A debt is paid on the basis of an interest rate This interest rate compensates the lender, who no longer has his liquid assets. As the term of the loan increases, the cost of money ________ _____________________________________ The risk free interest rate, r, represents ____________ _________________________________ Government securities are often considered to earn the _____________________ D. Lautier - UE 109 - 2018/19 8 8 Term structure of interest rates r (t,T) T D. Lautier - UE 109 - 2018/19 99 9 3  26/11/2019 All debt securities are affected, in a more or less pronounced way, by credit risk In the presence of this risk, the requirement to pay the lender increases Compensation should cover: - ________________ - ________________ A credit margin is added to _____________________ Credit risk is ________________________________ Term structure _________________________ For a given period and a given level of risk, the risk of interest rate R, is written: _______________ D. Lautier - UE 109 - 2018/19 10 10 10 Term structure of credit margins R (t,T) margin 3 margin 2 margin 1 risk free rate T D. Lautier - UE 109 - 2018/19 11 11 11 Ex-ante rate / maturity rate The debt is issued on the basis of an ______________ This rate represents the return that the lender can expect to receive: - ______________________________ - _______________________________ The realized / achieved rate at maturity R *, is: - ________________________________ - ________________________________ D. Lautier - UE 109 - 2018/19 12 12 12 4  26/11/2019 1.1.2. Economic principles related to credit risk General principles - ____________ of risk - _____________risk / _____________ risk Credit risk - Principle of _______________ - Principle of _______________ D. Lautier - UE 109 - 2018/19 13 13 13 Principle of adverse selection and exposure to credit risk Loan market The borrower has a better knowledge of the risk than __________________ The bank suffers from ___________________________ The bank refers to the ___________________________ _______________________________________ The bank requires an ____________not taking into account the _______________________________ The borrower ______________________________will tend to __________________________________ The observed default rates are _____________________ D. Lautier - UE 109 - 2018/19 14 14 Consequence: limitation of exposure - When banks are faced with an increase in interest rates, the principle of adverse selection continue to play - Limit exposure to certain counterparties: quantity, maturities, etc. - "Strict" limit: volume reduction and profit reduction - "Lax" limit: encourage the selection of positions of lesser quality D. Lautier - UE 109 - 2018/19 15 15 15 5  26/11/2019 Moral hazard principle "If you owe your bank EUR 100,000 and you do not have the amount , you're in a critical situation....... ___________________________________ _________________________________________" The bigger the size of the loan, the higher its riskiness A high amount encourages the borrower _________ _________________________ When a large borrower defaults, he/she ________ __________________________________________ Attitude towards moral hazard: ______________ D. Lautier - UE 109 - 2018/19 16 16 16 1.2. The extent of credit risk For a long time assimilated ____________________ __________________________________ The magnitude increases in parallel to _____________ ___________________________________ Today, the credit risk is considered the most important risk for companies and financial institutions D. Lautier - UE 109 - 2018/19 17 17 17 1.3. The manifestations of credit risk Counterparty default Change in the rating of the underlying asset Change in the rating of the issuer Variation of the signature spread D. Lautier - UE 109 - 2018/19 18 18 18 6  26/11/2019 Signature spread Bond margin. Private US / Bonds. Treasury, in basis points Commercial companies Aaa 67 Aa 85 A 99 Baa 136 Industrial companies Aaa 56 Aa 83 A 92 Baa 124 Service companies Aaa 79 Aa 87 A 105 Baa 147 D. Lautier - UE 109 - 2018/19 19 19 19 D. Lautier - UE 109 - 2018/19 20 20 Rating structures of credit spreads D. Lautier - UE 109 - 2018/19 21 21 7  26/11/2019 Variation of signature spread : example Bonds of the Mexican State: - Denominated in USD - Indexed to the rate of US government bonds Rates of US government bonds : 6% Risk premium: + 800 bp January 99 + 250 bp April 00 Value of Mexican bonds : - January 99 : _____________ - April 00 : ______________ D. Lautier - UE 109 - 2018/19 22 22 22 1.4. Exposure to credit risk 1. Instruments traded on the spot market - ___________ - ________________ - __________________ 2. Derivatives traded on the OTC market - ___________ - ___________ - ___________ - ___________ ________________________ D. Lautier - UE 109 - 2018/19 23 23 23 Section 2. The measurement of credit risk 2.1. The rating agencies 2.2. Expectations of losses 2.3. Default probabilities D. Lautier - UE 109 - 2018/19 24 24 24 8  26/11/2019 2.1. The rating agencies The rating activity involves assigning grades: to ________________ to _______________________ in order to measure the risk involved in each of the two Development in a context of ________________________ Reducing information asymmetry between lenders and borrowers D. Lautier - UE 109 - 2018/19 25 25 25 2.1.1. The major rating agencies 2.1.2. The ratings 2.1.3. Other information provided by the rating agencies D. Lautier - UE 109 - 2018/19 26 26 2.1.1. The major rating agencies Standard & Poor’s 40 – 45% of the global market Moody’s 30 – 35% of the global market FitchRatings 20 – 25% of the global market D. Lautier - UE 109 - 2018/19 27 27 9  26/11/2019 2.1.2. The ratings Objective: Synthetic Information Long-term securities (> 1 year) - ______________________________ - ______________________________ - __________________ - __________________ D. Lautier - UE 109 - 2018/19 28 28 Ratings on long-term securities I N S&P Moody’s Fitch V E AAA Aaa AAA S T M AA Aa AA E N A A A T BBB Baa BBB S BB Ba BB P E B B B C U CCC Caa CCC L A CC Ca CC T I C C C V E D D. Lautier - UE 109 - 2018/19 29 29 Ratings on short-term securities - Negotiable debt securities: _______________________ _______________________ _______________________ D. Lautier - UE 109 - 2018/19 30 30 10  26/11/2019 Ratings on short-term securities Standard & Poor’s Moody’s FitchRatings A1+ P1 A1+ A1 P2 A1 A2 P3 A2 P4 A3 A3 B B C C D D. Lautier - UE 109 - 2018/19 31 31 When deviation in rating is greater than 2 notes: __________ A borrower often has different ratings for his/her long and short-term securities D. Lautier - UE 109 - 2018/19 32 32 Modification of rating Two signals: - Placed under surveillance (________________) - Changing perspective (___________________) D. Lautier - UE 109 - 2018/19 33 33 11  26/11/2019 2.1.3 Other information provided by the rating agencies Statistical information - Probability of default of issuers - Transition Matrices D. Lautier - UE 109 - 2018/19 34 34 Weighted average of default probabilities by year Rating 1 2 3 4 5 6 Aaa 0,00 0,00 0,00 0,06 0,21 0,29 Aa1 0,00 0,00 0,00 0,28 0,28 0,49 Aa2 0,00 0,00 0,08 0,26 0,60 0,73 Aa3 0,08 0,13 0,25 0,38 0,55 0,76 A1 0,00 0,04 0,45 0,73 0,93 1,16 A2 0,00 0,03 0,20 0,54 0,82 1,10 A3 0,00 0,18 0,35 0,49 0,57 0,76 Baa1 0,05 0,36 0,73 1,09 1,42 1,69 … … … … … … … B3 13,66 22,58 29,30 34,40 39,42 42,80 D. Lautier - UE 109 - 2018/19 Moody’s 35 35 Transition matrix over one year, on average and on percentage Initial AAA AA A BBB BB B CCC D Rating AAA 93,66 5,83 0,40 0,09 … … 0,00 0,00 AA 0,66 91,72 6,94 0,06 … … 0,02 0,01 A 0,07 2,25 91,76 0,49 … … 0,01 0,04 BBB 0,03 0,26 4,83 83,23 … … 0,15 0,24 BB 0,03 0,06 0,44 4,44 … … 1,04 1,08 B 0,00 0,10 0,32 5,72 … … 3,84 5,94 CCC 0,15 0,00 0,29 1,91 … … 61,23 25,36 D. Lautier - UE 109 - 2018/19 S&P 36 36 12  26/11/2019 Transition matrix over five years, on average and on percentage Initial AAA AA A BBB BB B CCC D Rating AAA 73,35 20,96 4,13 1,12 … … 0,00 0,13 AA 2,70 68,34 25,67 3,79 … … 0,09 0,27 A 0,19 7,94 69,86 16,98 … … 0,21 0,61 BBB 0,31 1,69 19,67 60,47 … … 0,79 2,39 BB 0,07 0,48 3,79 24,43 … … 2,34 14,73 B 0,00 0,28 1,58 4,57 … … 3,70 36,06 CCC 0,29 0,00 0,59 4,41 … … 12,94 65,29 D. Lautier - UE 109 - 2018/19 S&P 37 37 37 2.2. Expected loss 2.2.1. A few reminders 2.2.2. Calculation of the present value of expected losses D. Lautier - UE 109 - 2018/19 38 38 38 2.2.1. Valuation of fixed income securities: reminders Price of a security: sum of the discounted future cash flows of this security 2.2.1.1. Actuarial approach 2.2.1.2. “Risk-neutral” approach D. Lautier - UE 109 - 2018/19 39 39 13  26/11/2019 2.2.1.1. Actuarial approach Assume: - T: maturity of the bond - C: annual coupon (fixed) - NV: Par value - y 0, T: interest rate for maturity T, observed at 0, expressed as an annual percentage - P 0, T: price of the bond with maturity T, observed at 0 D. Lautier - UE 109 - 2018/19 40 40 At equilibrium: C C C +VN P0,T = + +...+ (1+ y 0,1) (1+ y 0,1)(1+ y1,2 ) (1+ y 0,1)(1+ y1,2 )....(1+ yT _ 1,T ) The yield of the bond (yield to maturity) is by definition the rate y such that : C C C +VN P0,T = + +...+ (1+ y 0,T ) (1+ y 0,T )2 (1+ y 0,T ) T D. Lautier - UE 109 - 2018/19 41 41 Case of a zero coupon bond One expected cash flow: redemption Discounting during the whole detention period: VN ( ) −T P0,T = = VN 1+ y0,T (1+ y ) T 0,T That is, in continuous time: − y0,T ×T P0,T = VN × e D. Lautier - UE 109 - 2018/19 42 42 42 14  26/11/2019 Principle of actuarial valuation: - ______________________________________ - ______________________________________ If: - r is the risk-free interest rate - m is the credit margin y = ____________ y0,t = _______________ D. Lautier - UE 109 - 2018/19 43 43 2.2.1.2. Risk neutral valuation Principle : _______________________________ _______________________________ ___________________________________________ Determination: - __________________________ - ___________________________ D. Lautier - UE 109 - 2018/19 44 44 Valuation methods for a bond: Conclusion Actuarial method: ____________________________________ Risk neutral method: _____________________________________ Both methods ___________________________ D. Lautier - UE 109 - 2018/19 45 45 15  26/11/2019 2.2.2. Calculation of the present value of expected losses Expected loss by maturity Comparison: - ____________________________ - ______________________________________________ Zero coupon bonds (ZC) Hypothesis: ___________________________ The difference in the price of securities reflects _________ ____________________________________________ (the differences in payment originate _________________) D. Lautier - UE 109 - 2018/19 46 46 46 Example Nominal value of zero coupon bonds : NV = 100 Maturity Risk-free ZC Corporate ZC Expected interest rate interest rate loss 1 r0,1 = 3 % y0,1 = 3.25% 2 r0,2 = 3 % y0,2 = 3.50% 3 r0,3 = 3 % y0,3 = 3.75% 4 r0,4 = 3 % y0,4 = 3.85% D. Lautier - UE 109 - 2018/19 47 47 47 Calculation of expected loss at 1 year (discrete time) 1. Prices of securities of 1 year maturity: Value of a risk-free bond of maturity of one year ___________________________ Value of the corporate bond of maturity of one year: _____________________________ 2. Present value of the expected loss: ______________________________ As a percentage of the value of the risk-free security: ___________________________ D. Lautier - UE 109 - 2018/19 48 48 48 16  26/11/2019 Calculation of expected loss at 1 year (continuous time) Value of a risk-free bond of maturity of one year : __________________________ Value of the corporate bond of maturity of one year: ________________________ Present value of the expected loss: _______________________ As a percentage of the value of the risk-free security: ___________________________ D. Lautier - UE 109 - 2018/19 49 49 49 Example Maturity Risk-free ZC Corporate ZC Expected interest rate interest rate loss 1 r0,1 = 3 % y0,1 = 3.25% ______ 2 r0,2 = 3 % y0,2 = 3.50% 3 r0,3 = 3 % y0,3 = 3.75% 4 r0,4 = 3 % y0,4 = 3.85% D. Lautier - UE 109 - 2018/19 50 50 50 Calculation of expected loss at 2 years (continuous time) Value of a risk-free bond of maturity of 2 years : ________________________ Value of the corporate bond of maturity of 2 years: ___________________________ Present value of the expected loss: _______________________ As a percentage of the value of the risk-free security: _________________________ D. Lautier - UE 109 - 2018/19 51 51 51 17  26/11/2019 Example Maturity Risk-free ZC Corporate ZC Expected interest rate interest rate loss 1 r0,1 = 3 % y0,1 = 3.25% _______ 2 r0,2 = 3 % y0,2 = 3.50% _______ 3 r0,3 = 3 % y0,3 = 3.75% _______ 4 r0,4 = 3 % y0,4 = 3.85% _______ D. Lautier - UE 109 - 2018/19 52 52 52 Present value of expected loss associated with a risky security: generalization Assume: - NV : nominal value - y0,T : yield to maturity of a corporate ZC of maturity T - r0,T : yield to maturity of a risk-free ZC of maturity T Present value of the expected loss: ______________________________ As a percentage: ______________________________ D. Lautier - UE 109 - 2018/19 53 53 2.3. Probabilities of default 2.3.1. Probability of default with zero recovery rate 2.3.2. Probability with non-zero recovery rate 2.3.3. Application exercise 2.3.4. Conditional probabilities and market prices D. Lautier - UE 109 - 2018/19 54 54 18  26/11/2019 2.3.1. Probability of default with zero recovery rate Assume: - Q0,T : probability of default at T, estimated at 0 - (1 – Q0,T ) : probability of no default (survival) Hypothesis : In case of default, the bond will be worth nothing (recovery rate is zero) « risk-neutral » valuation of the corporate bond Risky flows : ______________________________ Present value: ______________________________ ______________________________ D. Lautier - UE 109 - 2018/19 55 55 55 There must be an equality relation between actuarial valuation and risk-neutral valuation ______________________________ Probability of default for maturity T: ______________________________ D. Lautier - UE 109 - 2018/19 56 56 56 Example. Calculation of Q 0,T Risk-free rate: r0,T = 3%, whatever the T Maturity Corporate Probability of ZC interest default rate 1 y0,1=3.25% Q0,1=0.25% __________ 2 y0,2=3.50% Q0,2=0.99% ___________ 3 y0,3=3.75% Q0,3=2.22% 4 y0,4=3.85% Q0,4=3.34% Q0,T : Cumulated probability of default for a maturity T, estimated at date 0 D. Lautier - UE 109 - 2018/19 57 57 57 19  26/11/2019 Relation between cumulated probability of default and credit margin: generalization Assume : - m 0, 1 : credit margin at 1 year, valued at 0 - r 0,1 : risk-free rate at 1 year, observed at 0 - Q 0,1 : probability of default at 1 year, observed at 0 Equality between actuarial valuation and risk-neutral valuation implies the following relationship : ______________________________ D. Lautier - UE 109 - 2018/19 58 58 ______________________________ If m0,1 is small compared to 1, it is possible to use the following approximation: ______________________________ ______________________________ D. Lautier - UE 109 - 2018/19 59 59 For any maturity T : ______________________________ As long as the approximation is valid : ______________________________ ______________________________ D. Lautier - UE 109 - 2018/19 60 60 20  26/11/2019 Probability of default during the year Maturity Corporate ZC Cumulated Probability interest rate probability of of default default during the year 1 y0,1 =3.25% Q0,1= 0.25% q0,1 2 y0,2=3.50% Q0,2=0.99% q0,2 3 y0,3=3.75% Q0,3=2.22% q0,3 4 y0,4=3.85% Q0,4=3.34% q0,4 D. Lautier - UE 109 - 2018/19 61 61 61 Example: probability of default during the year Maturity Corporate ZC Cumulated Probability of interest rate probability of default during default the year 1 y0,1 =3.25% Q0,1= 0.25% q0,1 = ______ 2 y0,2=3.50% Q0,2=0.99% q0,2 3 y0,3=3.75% Q0,3=2.22% q0,3 4 y0,4=3.85% Q0,4=3.34% q0,4 D. Lautier - UE 109 - 2018/19 62 62 62 Example. probability of default during the year Maturity Corporate Cumulated Probability of ZC interest probability of default during rate default every year 1 y0,1 =3.25% Q0,1= 0.25% q0,1 = 0.25% 2 y0,2=3.50% Q0,2= 0.99% q0,2 = _____ 3 y0,3=3.75% Q0,3= 2.22% q0,3 = _____ 4 y0,4=3.85% Q0,4= 3.34% q0,4 = ______ _______________________ ___________________________ D. Lautier - UE 109 - 2018/19 63 63 63 21  26/11/2019 Probabilities of default: conclusion Cumulated probability of default : Q0,T Probability of survival to maturity T: ______________________________ Probability of default «during period t »: q0,t ______________________________ D. Lautier - UE 109 - 2018/19 64 64 2.3.2. Probability of default with non-zero recovery rate The recovery rate is a function of the level of debt. Example* : - Bank loans 71% - Senior bond debt with security 63% - Senior unsecured bond debt 48% - Senior subordinated bond debt 28% - Junior subordinated bond debt 15% The recovery rate varies according to the year *Source : Moody ’s, statistiques D. Lautier - UE 109 - 2018/19 65 65 65 Assume: - y0,T : yield to maturity of a corporate ZC of maturity T - r0,T : yield to maturity of a risk-free ZC of maturity T - Q0,T: cumulative probability of default between 0 and T - RT: the recovery rate for the date T Value of a corporate bond: ______________________________ Cumulated probability of default ______________________________ D. Lautier - UE 109 - 2018/19 66 66 22  26/11/2019 Relationship between cumulated probability of default and the credit margin with non-zero recovery rate Assume: - m0,1 : credit margin at 1 year, valued at 0 - r0,1 : risk-free rate at 1 year - Q0,1: probability of default in one year - R1: the recovery rate in a year, estimated at 0 Equality between actuarial valuation and risk-neutral valuation implies: ______________________________ D. Lautier - UE 109 - 2018/19 67 67 ______________________________ ______________________________ If m 0,1 is small compared to 1, it is possible to use the following approximation: ______________________________ ______________________________ D. Lautier - UE 109 - 2018/19 68 68 For any maturity T: ______________________________ As the approximation is valid : ______________________________ ______________________________ D. Lautier - UE 109 - 2018/19 69 69 23  26/11/2019 When the recovery rate increases, the demand for compensation decreases: ______________________________ If R = 0 ______________________________ If R = 30% ______________________________ If R = 60% ______________________________ D. Lautier - UE 109 - 2018/19 70 70 2.3.3. Application exercise If we denote: T : the maturity of the investment q0,T : the probability of default during the year T NV: the amount of exposure RT : the recovery rate r0,T : the risk free interest rate The present value at time 0 of the probable loss during year T is equal to: ______________________________ D. Lautier - UE 109 - 2018/19 71 71 71 Question : Calculate the credit risk associated with a BBB bond over an investment horizon of: - 1 year - 2 years Knowing that: -the probability of default is: - 0.05% in the first year - 0.36% in the second year - The amount of exposure is: 20M - The recovery rate is 30%, irrespective of maturity The risk-free interest rates are: - at 1 year : r0,1=4,50% - at 2 years : r0,2=4,80% D. Lautier - UE 109 - 2018/19 72 72 72 24  26/11/2019 Expected loss during the first year (gross) : ______________________________ Expected loss during the second year (gross) : ______________________________ Credit risk in 2 years : _____________________ D. Lautier - UE 109 - 2018/19 73 73 73 2.3.4. Conditional probabilities (hazard rate) and market price : Conditional probabilities / unconditional Unconditional probabilities: probability of default «during period t », q0(t), extracted from the cumulated probability of default Q0,T : Probability of survival to maturity T: D. Lautier - UE 109 - 2019/20 74 74 Conditional probability Probability of default during period t, conditionally to the fact that the issuer has not defaulted until this period : ht D. Lautier - UE 109 - 2016/17 75 75 25  26/11/2019 Calculation of conditional probabilities from market prices : illustration Assume a zero coupon bond - Nominal value NV = 100 - Maturity T = 2 years - Bond price prior to expiry : P0.2, P1.2 - Risk-free rate : r0,1 = r0,2= 3% - Actuarial rate : y0,1 = 3.75% y0,2 = 4.15% - Anticipated recovery rates: R1 = R2 = R - Conditional probability of default: h01 and h12 At each period, the bond may or may not suffer a default. A binomial process is used to describe the evolution of the price D. Lautier - UE 109 - 2016/17 76 76 100 1-h12 P1,2 h12 1-h01 R x 100 P0,2 h0,1 R x 100 D. Lautier - UE 109 - 2016/17 77 77 For a bond of a one-year maturity: 100 1-h01 P0,1 h0,1 100 x R D. Lautier - UE 109 - 2016/17 78 78 26  26/11/2019 100 1-h23 P2,3 1-h12 h23 P1,3 100 R3 1-h01 h12 100 R2 P0,3 h0,1 R1 x 100 D. Lautier - UE 109 - 2016/17 79 79 P0.2 must be the same, whether the actuarial approach or the risk neutral approach is used. Price of the bond according to the actuarial approach: Price of the bond according to the risk-neutral approach : D. Lautier - UE 109 - 2016/17 80 80 We set R = 0 Conditional probability of default during year 1: Probability of default during year 2, conditional on the absence of default during year 1: D. Lautier - UE 109 - 2016/17 81 81 27  26/11/2019 Numerical application risk-free rate : r0,1 = r0,2= 3% actuariel rate : y0,2 = 4.15% conditional probability of default for year 1 : h0,1 = 0.75% conditional probability of default for year 2 : h12 : probability of default at 1 year in 1 year : forward probability D. Lautier - UE 109 - 2016/17 82 82 Application. Calculation of conditional default probabilities from the transition matrices Assume the transition matrix at 1 year following : AAA AA A D AAA 0.90 0.10 0 0 AA 0.05 0.80 0.10 0.05 A 0 0.10 0.80 0.10 D 0 0 0 0 Probability that a AAA bond will default at 1 year: ________ Probability that a A bond will default: __________ Probability of a transition between AAA and AA at 1 year: ___ D. Lautier - UE 109 - 2016/17 83 83 Hypothesis : -The rating change from one period to another is independent of past changes - An AA counterparty has 5% probability of default in year 1, whatever its previous situation (AAA, AA or A) - The change of state from one period to another is independent of the past path - The process of the rating change is a Markov chain D. Lautier - UE 109 - 2016/17 84 84 28  26/11/2019 Calculating the conditional probability of default during year 2 Bond AAA: A default in 2 years implies: - The transition in 1 year at level __________ - The transition in 2 years at level ________ Probability of a default in 2 years: Survival rate in two years of AAA : D. Lautier - UE 109 - 2016/17 85 85 Bond AA: A default in 2 years implies ( __ possible paths): - The maintenance of ___ in 1 year (___) then a default (___) - The transition to ___ in one year (___) then a default (___) - A default in one year (___) Probability of default in 2 years: Survival rate in two years of AA : _________ D. Lautier - UE 109 - 2016/17 86 86 Bond A : A default in 2 years implies (_____ possible paths): - A maintainance of ___ in 1 year (___%) and a default (___%) - The transition to ____ in 1 year (___%) and a default (___%) - A default in one year (____%) Probability of default in 2 years: Survival rate in two years of AA : _______________ D. Lautier - UE 109 - 2016/17 87 87 29  26/11/2019 Relationship between conditional and unconditional probability Q0(1) = h1 Q0(2) = h2 (1 – h1) Q0(3) = h3(1 – h2)(1 – h1) …. T -1 Q0 (T ) = hT Õ (1 - h ) t =1 t D. Lautier - UE 109 - 2016/17 88 88 Section 3. The credit derivative instruments 3.1. Definition 3.2. Different strategies based on the use of credit derivatives 3.3. The main derivative instruments D. Lautier - UE 109 - 2016/17 89 89 3.1. Definition of credit derivatives A financial instrument whose cash flows depend solely or in part on the credit quality of the issuer of a reference asset. The payment of flows is linked: -to the occurrence of a formal credit event -a variation in the signature spread of the issuer of the reference asset D. Lautier - UE 109 - 2016/17 90 90 30  26/11/2019 3.2. Different strategies based on the use of credit derivatives Hedging Portfolio management– diversification Investment Speculation on: - the level of credit margin - the credit quality of an issuer Arbitrage between maturities D. Lautier - UE 109 - 2016/17 91 91 3.3. Major credit derivatives 3.3.1. Credit default swaps (CDS) 3.3.2. Instruments on credit margin (spread) 3.3.3. Mixed instruments 3.3.4. Other derivatives 3.3.5. Structured products D. Lautier - UE 109 - 2016/17 92 92 3.3.1. Credit default swaps (CDS) Instruments related to a formal credit event Specific nature of these instruments: -triggering the protection is linked to a credit event -a credit event is more difficult to determine than a price change D. Lautier - UE 109 - 2016/17 93 93 31  26/11/2019 3.3.1.1. Definition of a credit default swap Contract by which the buyer of protection agrees to pay a steady stream against a payment upon the occurrence of a credit event The payment of the protection buyer is suspended in case of default Credit risk may include: - A well defined asset (micro) - The credit quality of an issuer (macro) - The credit quality of several transmitters Risk on the credit quality of an issuer - Definition of deliverable securities - Problems of cheapest, liquidity, etc. D. Lautier - UE 109 - 2016/17 94 94 Synthetic transfer of credit risk: no transfer of assets Cost of hedging (premium) expressed as a percentage of the nominal value of the contract This premium gives the price of risk: -by maturity (term structure of margins) -by rating class Premium In AOA, the premium of a CDS on a bond must be equal to the credit spread of the bond Basis = premium CDS - credit spread D. Lautier - UE 109 - 2016/17 95 95 3.3.1.2. Credit Event Beginning of standardization by ISDA after the defaults of Russia (1998) and Argentina (2002) Events: -Default on payment (principal or interest) -Bankruptcy of the reference entity -Restructuring of the underlying debt -Moratorium (delay in payment) D. Lautier - UE 109 - 2016/17 96 96 32  26/11/2019 3.3.1.3. Payment terms in case an event is triggered 2 types: physical settlement / cash settlement Equivalent if the market value of securities can be established beyond doubt Until 2006, the payment was by physical delivery This method was creating a big problem Liquidity risk Hence the idea of a cash settlement procedure ISDA Protocol in September 2006 D. Lautier - UE 109 - 2016/17 97 97 3.3.1.4. Different categories of CDS Uninominal credit default swap (Single name CDS) Reciprocal credit default swap (CDS Two Ways) Multinomial default swap (CDS Multi name, Basket Default Swap) on a list, portfolio, index or tranche D. Lautier - UE 109 - 2016/17 98 98 3.3.1.5. Simple swap of default risk: example 01/01/N Bond issues Company ABC DEF Rating Baa3 AAA Nominal USD 1 Md USD 2 Md Maturity 5 years 5 years Nominal interest 12% 7% A pension fund invests $ 20 millions in ABC bonds. The pension fund is exposed to default risk of ABC D. Lautier - UE 109 - 2016/17 99 99 33  26/11/2019 The pension fund buys a CDS from its Bank Nominal : USD 20 millions Expiry: 5 years Fix leg : 240 basis points per year Recovery rate: 100% Differential cash settlement (cash settlement) Event Generator: default on interest or principal payments 1. What are the financial flows paid between the pension fund, the Bank, and ABC in the absence of an event giving rise to credit default? D. Lautier - UE 109 - 2016/17 100 100 Pension Bank fund Bonds ABC D. Lautier - UE 109 - 2016/17 101 101 2. What is the return on investment of the pension fund at the end of this swap? D. Lautier - UE 109 - 2016/17 102 102 34  26/11/2019 3. Given that the interest rate on the market is 12%, what would be in the absence of default of ABC, the market value of bonds held by the pension fund on the date of 01/01 / N +3? 2 400 000 2 400 000 20 000 000 + + = 20 000000 (1+ 12% ) (1+ 12% )2 (1+ 12% )2 On 02/01 / N + 3, ABC is unable to meet its financial commitments. The market value of ABC securities falls by 60% 4. What are the payments made from the pension fund and the Bank on the date of 02/01 / N + 3? D. Lautier - UE 109 - 2016/17 103 103 Cash Settlement : Pension Bank fund Bonds ABC D. Lautier - UE 109 - 2016/17 104 104 Condition to be met for the hedging to be effective: the default risk of the ABC and that of the Bank should not be correlated D. Lautier - UE 109 - 2016/17 105 105 35  26/11/2019 3.3.1.6. Reciprocal credit default swap Example The portfolio of assets of the Bank ABC is overweighted in debt securities of the company XYZ: USD 7 million ABC wants to diversify its credit risk by: - Disposing a portion of the risk associated with XYZ - Including a portion of the risk associated with the company WXY Bank CDE is found in the opposite situation: - CDE has a claim on WXY for an amount of USD 6.5 million and would like to reduce the credit risk exposure to this debt - CDE wants to increase its credit risk exposure associated with XYZ D. Lautier - UE 109 - 2016/17 106 106 Hypotheses : – The credit risks associated with the two assets are identical – The credit risk of these assets are not correlated – Each Bank wants to reduce and increase its exposure for an amount of $ 1,000,000 The 2 Banks enter in a reciprocal default swap D. Lautier - UE 109 - 2016/17 107 107 Exposure to credit risk associated with USD 1 million of the debt of XYZ Bank Bank ABC CDE x basis points per year Exposure to credit risk associated with USD 1 million of the debt of WXY USD 7,000,000 USD 6,500,000 Debt Debt XYZ WXY D. Lautier - UE 109 - 2016/17 108 108 36  26/11/2019 Exposure to credit risk associated with USD 1 million of the debt of XYZ Bank Bank ABC CDE Exposure to credit risk associated with USD 1 million of the debt of WXY USD 7,000,000 USD 6,500,000 Debt Debt XYZ WXY D. Lautier - UE 109 - 2016/17 109 109 The credit risks associated with the two assets are not identical The risk of the claim XYZ is larger than that of the claim WXY The credit risk of these assets are not correlated Bank CDE requires to reduce its exposure to WXY by $1,000,000 D. Lautier - UE 109 - 2016/17 110 110 Exposure to credit risk associated with USD 1 million of the debt of WXY Bank ABC Bank CDE Exposure to credit risk associated with (USD 1,000,000 -X) of the debt of XYZ USD 7,000,000 USD 6,500,000 Debt Debt XYZ WXY D. Lautier - UE 109 - 2016/17 111 111 37  26/11/2019 Conditions for hedging to be effective: Lack of information asymmetry in favor of one of the two Banks Lack of adverse selection effect D. Lautier - UE 109 - 2016/17 112 112 3.3.1.7. Credit default swaps on a basket / index More underlying reference assets Size of portfolios: from 5 to 125 underlying assets Nature of portfolios: a mixture of sovereign entities, corporate assets, with sector diversification, geographical... Frequent standardization (development of indices) The exercise of the CDS is triggered when a credit event affects an underlying asset Portfolio of CDS: CDS by reference D. Lautier - UE 109 - 2016/17 113 113 Examples First to default basket CDS : Payment triggered by the first credit event affecting one of the underlying assets The buyer of the swap: -remains exposed to the credit risk associated with the other underlying assets -does not know which of the underlying assets will be affected first Second to default basket CDS Nth to default basket CDS D. Lautier - UE 109 - 2016/17 114 114 38  26/11/2019 Subordinated CDS Basket: covers losses incurred by a portfolio up to a certain amount Senior CDS Basket: cover losses from a certain amount onwards Slices: give rise to compensation within an interval (k, K) k: attachment point = minimum loss threshold K: detachment point = maximum loss threshold D. Lautier - UE 109 - 2016/17 115 115 3.3.1.8. The main credit indices CDX : - North American companies - Emerging Markets Itraxx : - European companies - Rest of the world Indices traded on several maturitys (most important: 5 and 10) Equally weighted indices Spread: average spread of CDSs that compose the index Indices reconstructed every six months Indices developed by Markit D. Lautier - UE 109 - 2016/17 116 116 Tranches on index Buying protection on a tranch Example: [0-3%] Protection in the first n defaults, until the portfolio has lost 3% Tranches on ITraxx : 0-3% ; 3-6%; 6-9%; 9-12%; 12-22% Allows to form expectations about the default correlations of the securities comprising the index D. Lautier - UE 109 - 2016/17 117 117 39  26/11/2019 Tranches on index: application example Tranche of a basket of securities worth EUR 700 M. Attachement point: k = 3% of nominal Detachement point: K = 6% of nominal Premium : 150 bp, paid on tranche (K – k) D. Lautier - UE 109 - 2016/17 118 118 H1. At N, the cumulated loss on the basket of assets amounts to EUR 13 M. No compensation H2. En N+1, the cumulated loss amounts EUR 25 M. Compensation paid: The defaulted security exits the basket The nominal of the tranche changes from 21M to 17 M. The premium becomes: H3. At N+m, the cumulated loss amounts to EUR 45 M The tranche ceases to exist from EUR 42 M D. Lautier - UE 109 - 2016/17 119 119 The CDS play a central role in the credit market Relatively high liquidity The CDS spreads become indicators: -of corporate default risk -of equity indices’ evolution D. Lautier - UE 109 - 2016/17 120 120 40  26/11/2019 3.3.2. Instruments on credit margin The flows associated with these instruments depend exclusively on the evolution of the signature spread: - Between the state and a private issuer - Between two states - Between two private issuers Futures on credit margin: Forward spread Options on spread D. Lautier - UE 109 - 2016/17 121 121 Forward spread : example A portfolio manager holds bonds rated AA. - Nominal amount: 5 000 000 euros. - Nominal rate: 12% - Duration: 6.8 - Yield: OAT + 70 bp. The manager anticipates a deterioration in the quality of the signature of the issuer, and a spread increase of 50 bp over the period of 1 year. He wants to protect himself against an increase greater than 30 basis points. D. Lautier - UE 109 - 2016/17 122 122 The manager enters a forward spread with the Bank: - Nominal Amount : 5,000,000 euros - Expiry : 1 an - Exercise margin: 100 bp (70 + 30) 1. What are the payments made between the Bank and the manager if, one year later, the bond yield rose by 10 basis points? D. Lautier - UE 109 - 2016/17 123 123 41  26/11/2019 The Manager shall pay to the Bank the difference between: - The exercise margin of the contract - The realized credit margin 2. 2. What would have happened if, one year later, the yield increased by 60 basis points? D. Lautier - UE 109 - 2016/17 124 124 The Bank would have paid to the manager an amount offsetting the decline in the value of the bonds: D. Lautier - UE 109 - 2016/17 125 125 3.3.3. Mixed Instruments: Total return swap Total return swap Product allowing to replicate the economic performance of a basket or of an underlying asset Synthetic replication of performance Underlying assets exposed to credit risk Underlying: bond or other asset, basket of credit, index... Total return: regular exchange - of coupons & profit/ loss in capital - Against a stream of interest (financing of position) D. Lautier - UE 109 - 2016/17 126 126 42  26/11/2019 Total Return Swap Operation by which two operators who become counterparties make an agreement for specific dates and for a certain period: For the first counterparty (swap buyer): - To pay interest on a loan - To receive the performance of an asset or of a basket For the second counterparty (swap seller): - To receive the interest on the loan - To pay the performance of an asset or of a basket D. Lautier - UE 109 - 2016/17 127 127 Fixed or floating interest rate A B Performance D. Lautier - UE 109 - 2016/17 128 128 Total return swap : example A European pension fund wishes to invest for 1 year, EUR 100M. on a bond basket issued by Icelandic companies The fund wants to borrow at a variable rate, subject to review every six months At 10/11 / N-1, the fund enters into a total return swap with an investment Bank The Bank buys the securities constituting the basket and keeps them under its belt The securities are purchased at nominal value D. Lautier - UE 109 - 2016/17 129 129 43  26/11/2019 Basket Funds received Funds paid Coupons Variable rate + Profits Variable rate Coupons + Losses D. Lautier - UE 109 - 2016/17 130 130 - Each semester, the Bank pays the pension fund 5% coupons earned on the bonds and the capital gains recorded - - Each semester, the Fund pays a premium to the Bank corresponding to Euribor 6M + a margin of 80 bp, as well as the loss on securities D. Lautier - UE 109 - 2016/17 131 131 Date Basket Euribor Coupon Interest Basket 6M leg leg 10/11/N-1 100 5.87% (1) (2) 10/05/N 112 6.82% 05 3.3350 17 10/11/N 108 05 4.2672 1 (4) (3) D. Lautier - UE 109 - 2016/17 132 132 44  26/11/2019 The different categories of total return swaps Standard Swap - Allows to create a synthetic investment in a local index Composite Swap - Synthetic investment on a foreign index - Index converted into the currency of the investor - Simultaneous exposure to the performance of the index and to currency risk D. Lautier - UE 109 - 2016/17 133 133 Quanto swap - Fluctuations in exchange rates have an impact on the structure of flows generated by a composite swap - To manage this risk, you can: - Make use of forward transactions (imperfect hedging) - To set up a quanto swap The foreign index is converted into the currency of the investor at fixed exchange rate for the whole period Exchange rate is fixed at the signing of the swap Full performance on the foreign index, independent of exchange rate D. Lautier - UE 109 - 2016/17 134 134 The standard index swap leads a relocation, each period, of the capital increased or decreased according to the performance of the index - Fractions and management costs Swap of investor index: - Periodic payment of only the flows associated with interest and coupons - Variation in the index paid at maturity D. Lautier - UE 109 - 2016/17 135 135 45  26/11/2019 titrisation Section 4. Securitization 4.1. Definition 4.2. Mechanism 4.3. Interest 4.4. Structuring a securitization transaction 4.5. Risk management of a securitization transaction D. Lautier - UE 109 - 2019/20 136 136 4.1. Definition la titrisation c’est une technique de financement. C’est securitization càd Financing technique first used in the United States in transformer des assets en titres the 1960s Securitization = __________________________ ________________________________ Periodic and final repayment of securities c’est la création de nouveaux titres Creation of ____________________________________ _____________ Objective: ________________________________ objectif: rendre liquide des actifs illiquides D. Lautier - UE 109 - 2019/20 137 137 4.2. Mechanism Three steps A. ______________________________________: assignement of assets to a separate legal entity the Securitization Vehicle also known as the Special Purpose Vehicle (SPV) Assets Company SPV D. Lautier - UE 109 - 2019/20 138 138 46  26/11/2019 issue of marketable securities: on vend des titres de dette aux marchés B. _________________________________ Assets Securities Company SPV Financial markets D. Lautier - UE 109 - 2019/20 139 139 funding C. _______________ Assets Securities Company SPV Financial markets Funding Amount raised D. Lautier - UE 109 - 2019/20 140 140 4.3. Motivation Access financial markets: Distribution response to funding needs (initial objective Response _____________________________ ______________________________________ credit risk relief: – Securitized assets are removed from the balance sheet: decrease in bankruptcy rate _____________________ improved solvency ratio ______________________ – Financing is not recorded as a liability: __________________________ improvement of the debt/equity ratio Synthetic securitization no asset transfer - ______________________ – ________________________________________ pure risk transfer through credit derivatives D. Lautier - UE 109 - 2019/20 141 141 47  26/11/2019 4.4. Structuring a securitization Asset Pool Terms of issuance Players Constraints D. Lautier - UE 109 - 2019/20 142 142 Asset pool Originally, receivables with a maturity of more than two years... … then short-term receivables Originally, receivables held by credit institutions... … then receivables held by other entities Originally, “safe” receivables … … then non-performing loans, bad debts and contested claims Originally, homogeneous receivables … … then heterogeneous receivables Future claims Real assets D. Lautier - UE 109 - 2019/20 143 143 Examples of assets Financial assets : - Real estate loans - Business loans - Debts incurred by LBO (Securitization Buy Out) Tangible assets : - Buildings - Planes - Works of art - Car fleets D. Lautier - UE 109 - 2019/20 144 144 48  26/11/2019 Intangible assets - Licences - Patents Debts - Consumer loans - Auto loans and leases Future flow receivables Securities issued in a securitization transaction D. Lautier - UE 109 - 2019/20 145 145 Terms of issuance 1. Type of securitization vehicle : classic (single seller - _____________________ - ____________________ rechargeable multi support - ______________________ multi seller - ______________________ 2. Nature of the securities : similarities with conventional bonds - ________________________________ similarities with savings products - _________________________________ combining products of variable maturities - _________________________________ D. Lautier - UE 109 - 2019/20 146 146 3. Maturity of the securities : - Short term: _________________________________ asset backed commercial paper (ABCP) - Medium and long term: Mortgage backed securities (MBS) Residential: RMBS Commercial: CMBS Collateralized loan obligations (CLO) Collateralized debt obligations (CDO) Asset backed securities (ABS) 4. Rating of securities - _____________________ cost of financing - _____________________ credit risk - _____________________ liquidity of securities private or public 5. Placement of securities: _______________ D. Lautier - UE 109 - 2019/20 147 147 49  26/11/2019 Players Originator ______________________________________________ financial institutions, insurance companies, corporations… ________________________________________________ Arranger: _____________________________________ structures the transaction (investment banks) Issuer (securitization vehicle): - Trustee - Custodian - Auditor Rating agency: ___________________- rates the securities Law firm Investors: financial institutions, investment funds, insurance companies, corporations, public entities, individuals D. Lautier - UE 109 - 2019/20 148 148 Constraints Legal constraints Costs and deadlines D. Lautier - UE 109 - 2019/20 149 149 1- Legal constraints General constraints - __________________________________ bankruptcy of the securitization vehicule, sauf qu’il est censé ne jamais faire faillite - __________________________________ perfect transfer of receivables Country specific constraints - _________________________ nature of supporting assets type of vehicule - ___________________________ D. Lautier - UE 109 - 2019/20 150 150 50  26/11/2019 2 - Costs and deadlines Bespoke transaction: _______________ variable costs Cost structure: - Repayment of securities - Management fees - Rating fees - Arranger's commission - Hedging (interest rate, FX, credit risk) Total: 0.5% to 1.5% of funding Minimum timeframe: 1 year ______________________________________ D. Lautier - UE 109 - 2019/20 151 151 4.5. Securitization risk management Risks related to the different players Risks related to the asset pool Risk management techniques Control of securitization transactions D. Lautier - UE 109 - 2019/20 152 152 Risks related to the different players Seller (also referred to as Transferor): - Rating agencies - External guarantees Securitization vehicle (SPV) - Control by securities exchange authorities - Auditors - External guarantees Rating agency D. Lautier - UE 109 - 2019/20 153 153 51  26/11/2019 Risks related to the asset pool Nature of risks: - ___________________ credit risk - Delinquency - Default - ____________________ interest rate risk - Maturity mismatch (assets vs notes) - Prepayment risk (if interest rates decline) risque de change - ___________________ D. Lautier - UE 109 - 2019/20 154 154 Mortgage backed securities (MBS) and prepayment risk Securities secured by a loan portfolio sauf que auj les taux ont baisse donc risque que tout le monde rembourse son pret en avance sauf que les véhicule et la titrisation ont été fait ya plusieurs années – Bonds selon le taux de l’époque et donc avec la rémunération de l’époque, si les gens Repayment: cash flows generated by the prepayent le véhicule n’aura plus assez d’argent pour payer les bond holder du véhicule underlying portfolio Simplest MBS structure : Mortgage pass-trough – Every month, all interest and principal payments from the underlying portfolio go directly to the holders of MBS (once fees have been paid) D. Lautier - UE 109 - 2019/20 155 155 A fixed rate mortgage portfolio is often repaid in constant annuities Each annuity represents a partial principal repayment plus interest on the outstanding principal Over time, the interest portion of the payment decreases while the principal portion increases accordingly D. Lautier - UE 109 - 2019/20 156 156 52  26/11/2019 Expected cash flows of a 30-year mortgage (with fixed monthly payments) Principal Monthly payment (fixed) Interest 0 10 20 30 Years D. Lautier - UE 109 - 2019/20 157 157 Borrowers may be able to prepay (optional) When the prepayment option is exercised, the payment is sent to the MBS holders Acceleration of principal repayment Decrease of interest earned D. Lautier - UE 109 - 2019/20 158 158 Uncertainty regarding final maturity of securities Effectively, securities have embedded optionality MBS buyers become option sellers – They are compensated for this additional risk by receiving a higher yield on their securities – This extra yield should correspond to the premium they would earn if they were to sell the option separately Interest rates are the main factor influencing early repayments: - Prepayments rise when rates fall (borrowers can refinance elsewhere more cheaply) - No prepayments when rates go up D. Lautier - UE 109 - 2019/20 159 159 53  26/11/2019 pas au partiel Risk management techniques and guarantee mechanisms Delinquency risk: - Cash account - External guarantee Default risk: - Seller’s guarantees: In cash On the assets - Credit enhancement D. Lautier - UE 109 - 2019/20 160 160 Credit enhancement - External guarantee - Total: solvency risk - Directe : solvency and liquidity risk - Reserve fund - Overcollateralization - Subordination (issuing debt securities in tranches) Senior, junior or subordinate tranches D. Lautier - UE 109 - 2019/20 161 161 au partiel Subordination mechanism: example At t=0, when the securities are sold to the public Receivables Senior tranche: 100% = €1,000 50% (€500) Subordinated tranche 1: 30% (€300) Subordinated tranche 2: 20% (€200) D. Lautier - UE 109 - 2019/20 162 162 54  26/11/2019 At t=n in the future Default rate of 25% (i.e. €250) Default Receivables Senior tranche 25% (€250) €750 50% / €500 No loss Default Subordinated tranche 1 20% (€200) 30% / €250 €50 written off (17% loss) Subordinated tranche 2 20% / nil Investors in subordinated tranches €200 written off (100% loss) need to be compensated for the extra risk they undertake. So they earn a higher yield on their investment. D. Lautier - UE 109 - 2019/20 163 163 Guarantee mechanisms Delinquency risk: - Cash account - External guarantee Default risk: - Seller’s guarantees: - In cash - On the assets - Credit enhancement Currency and interest rate risk: swaps D. Lautier - UE 109 - 2019/20 164 164 Currency risk: example Currency Swap (USD/EUR) Bank Receivables ABCP (EUR) in USD Seller SPV Markets Funding Proceeds (EUR) (USD) D. Lautier - UE 109 - 2019/20 165 165 55  26/11/2019 Interest rate risk: example Interest Rate Swap (IRS) Bank Receivables (long maturities) ABCP (short term) Seller SPV Markets Long term Proceeds from Funding sale of ABCPs D. Lautier - UE 109 - 2019/20 166 166 Examples of portfolio structuring Asset pool: - Value: €1,000 - Risk level: B Rating agency criteria - BBB rating is feasible with a reserve of 0.75% reserves dans le SPV - A rating needs a reserve of 3% - AA rating needs a reserve of 5% - AAA rating needs a reserve of 8% D. Lautier - UE 109 - 2019/20 167 167 Structuring options BBB A AA AAA 99.25% 97% 95% 92% 8% 5% 3% 0.75% D. Lautier - UE 109 - 2019/20 168 168 56  26/11/2019 Structuring options Class A – 92% Class A – 92% Rated AAA Rated AAA Class B – 3% Rated AA Class B – 5% Rated AA Class C – 2% Rated A Class C – 2.25% Rated BBB Class D – 2.25% Rated BBB 3% 5% 8% 3% 8% Class D – 0.75% Class E – 0.75% Not Rated Not Rated D. Lautier - UE 109 - 2019/20 169 169 Control of securitization transactions Regulatory authorities ˗ Constitution of the SPV ˗ Modifications Auditor Rating agencies ˗ Assessment of the late payment and non-payment risk (total or partial) associated with the receivables ˗ Implementation of guarantees D. Lautier - UE 109 - 2019/20 170 170 57