Credit risk

Credit Risk Management Solution of the Year: Moody’s Analytics

Moody’s Analytics won the award for Credit Risk Management Solution of the Year, in recognition of its continued delivery of a suite of best-in-class credit risk management solutions. It responded to investors’ growing need to remain alert to potential defaults amid rising interest rates, high inflation, the Russian-Ukrainian war and the crisis in China’s real estate sector.

Its flagship solutions, including the CreditEdge platform and the RiskCalc tool, help improve the way its customers manage risk, stress testing, provision for credit losses, portfolio management, risk reporting and regulatory conformity. Credit scoring models and solutions provide actionable insights into businesses of all sizes and types. These range from small businesses and large private and public enterprises to commercial real estate, insurance companies, financial institutions and project finance transactions. And it’s all made possible by the comprehensive data ecosystem that Moody’s Analytics owns. Data Alliance, Orbis, REIS and economic data feed its models and augment credit risk analysis.

The CreditEdge and RiskCalc solutions have undergone powerful upgrades over the past 12 months. CreditEdge now helps measure credit risk for more than 50,000 public entities worldwide and draws on a database of 16,000 defaults over 50 years, enabling greater accuracy and consistency in risk management. Meanwhile, RiskCalc offers a comprehensive approach to assessing private business default and recovery and is powered by Moody’s Analytics Data Alliance, one of the world’s largest credit data consortia.

A combined signature metric in CreditEdge and RiskCalc is the forecast expected default frequency (EDF), which measures the likelihood of a company defaulting over the next 12 months. One of the major updates to its credit risk solutions over the past 12 months has been the rollout of the beta version of the EDF-X APIs. It seeks to provide pre-scored and continuously updated probability of default metrics for over 400 million businesses worldwide, including 10 years of history. The APIs can even calculate the probability of default with little or no company-specific financial data using country, sector and size to provide a benchmark estimate. It will not only provide PD metrics, but also company ID, PD term structure, implied ratings, credit limits and confidence indicator for the rating method used.

“The EDF-X APIs is the first step in the evolution of Moody’s Analytics’ flagship enterprise credit risk assessment solution,” the company wrote. “CreditEdge and RiskCalc (private company EDF model) will be combined into a single unified platform from September 2022.”

Moody’s Analytics credit scoring models also help the industry understand the implications of climate change and environmental, social and governance considerations on credit risk. He introduced a climate-adjusted version of the public company EDF model for quantifying corporate credit risks associated with climate change. The solution incorporates four climate policy scenarios designed by the Network for Greening and Financial System, a system contributed by a group of central banks and supervisors to share best practices, as well as cutting-edge data and assessment tools from Moody’s ESG solutions to predict the physical and transition risks associated with global warming.

The adjusted climate EDF is available monthly for more than 40,000 public entities, as well as a 30-year duration structure and an implied rating with a 10-year duration structure. Users can take advantage of a converter for private companies based on company location, industry, size, and emissions/energy intensity.

Another feature accessible through CreditEdge and RiskCalc is their early warning systems, which streamline the commercial and industrial portfolio management process. Users can categorize public and private exposures with an early warning score that captures multiple credit risk signals and provides an overall assessment of credit deterioration.

Moody’s Analytics has improved the performance and data available in the Early Warning System. It can now handle the bulk upload of thousands of companies, previously hundreds, to help customers create and analyze large portfolios. All private company data models have also been integrated into the system so clients can seamlessly monitor public and private exposure risks and opportunities.

Building on its flagship credit risk solutions, the company has also identified a gap between financial statements and market reality during the Covid-19 pandemic. To bridge this gap, Moody’s Analytics has created a model that generates full pro forma tax returns and balance sheets as of any future date. It also thoroughly analyzes credit risk and liquidity at the individual company and portfolio level. These will be available directly to customers in a future release.

Until the end of 2021, the company produced the EDF report for business, detailing the impact of the pandemic on credit metrics and industry trends. The analytics approach has informed other applied research and webinars, which help clients navigate market shocks such as the energy crisis and the Russian-Ukrainian conflict and prepare for the “next normal.”

“Moody’s Analytics credit scoring solutions go beyond simply providing risk metrics,” the company wrote. “Our credit scoring solutions provide actionable insights and frameworks to make fast and effective credit decisions.”