Credit risk

Investment manager streamlines credit risk assessment

Global inflation, ongoing supply chain issues and a war between Russia and Ukraine are just some of the issues facing investment managers in APAC and around the world. Commercial real estate (CRE) is particularly vulnerable following the negative impacts of the COVID-19 pandemic. On the office side alone, a new balance has yet to emerge given the adoption of the hybrid working model. Landlords face higher vacancy rates, lower rents and lower values ​​over the next few years – and the growing risk of recession adds to downside risk.[1] The establishment of a rigorous risk assessment system for CRE assets is more important than ever.

This company is a leading private markets finance and investment firm that provides capital solutions to property owners and developers, as well as investment opportunities for co-investors. The company holds the majority of its funds in a real estate portfolio and a smaller portion in a business loan portfolio. For real estate, members of the investment team are responsible for assessing the possibility of borrowers defaulting on interest and/or principal on their CRE loans. For business loans, they must assess the possibility that a business may default. The team’s current risk management practices lacked depth and consistency and needed significant improvement given today’s uncertain market conditions.

Pain points

The company’s current approach to risk management needed to be enhanced with data and analytical tools that would enable investment team members to obtain:

  • A granular, consistent and transparent framework for measuring and assessing the credit risk of loans.
  • A quantitative approach assess the probability of default (PD) for rated and unrated, public and private companies in the corporate loan portfolio.
  • An early warning system quickly identify any deterioration in a company’s credit quality.
  • The ability to streamline workflows to increase efficiency.
  • Flexible delivery options to easily integrate data into internal applications.

A relatively new member of the team was using S&P Global Market Intelligence (“Market Intelligence”) credit risk management solutions in his previous role and encouraged other members to learn more.

The solution

Market Intelligence specialists first suggested that the investment team use the proprietary CRE Scoring Tool (CREST) ​​which uses a scorecard approach to measure and assess the credit risk of loans. The scorecards provide a logical quantitative and qualitative rule-based approach that is easy to use, with 75% of results falling within one notch of public credit scores. The approach is particularly useful for portfolios with low default rates which, by definition, do not have the detailed internal default data needed to build statistical models.

This could then be complemented by the proprietary Credit Analytics solution which combines state-of-the-art models with robust data to help users easily monitor the creditworthiness of companies in their portfolios. The Credit Analytics model suite includes Probability of Default Fundamental Model (PDFN), CreditModelMT and PD Market Signals Model (PDMS). Together, they make it possible to assess companies of any size and set up an early warning system to detect possible failures.

The combined solutions would also allow members of the investment team to assess the credit quality of the builders themselves and any subsequent impact on building construction risk for the project the team is financing. The dashboard provides the ability to assess property-related creditworthiness which includes the roles and responsibilities of the builder in the construction phase, while Credit Analytics helps to get an idea of ​​the default risk of builders. This links the impact of the risk of builder default to the analysis of real estate assets.

This set of combined solutions would provide the data and analytical tools needed to quickly identify any emerging issues within real estate and business loan portfolios. It would also help the investment team better understand the various factors that contribute to increased risk and a change in creditworthiness. The team would be well placed to:

Stay on top of CRE portfolio risk

CREST provides a granular, objective, consistent and transparent framework for measuring and assessing the credit risk of loans, helping to achieve risk management objectives. It facilitates multiple business applications, including loan origination and monitoring, credit pricing, and portfolio management.

Easily assess small business creditworthiness

PDF allows users to assess the one to five year default risk of public and private banks, corporations and REITs. PDs can be mapped to quantitatively derived credit scores[2] (i.e. “bbb”) for better comparability. Workflows are optimized by accessing a pre-scored database leveraging comprehensive and timely data on over 50 million[3] companies globally. Users can also determine the default risk of a single company or a portfolio of companies.

Easily assess the creditworthiness of mid- and large-cap companies

CreditModel’s A suite of statistical models, trained on credit ratings from S&P Global Ratings, allows users to quickly assess the long-term creditworthiness of mid and large caps, public and private banks, insurance companies and worldwide. The models use financial statements and macroeconomic data to generate a quantitative credit rating that statistically matches an S&P Global Ratings credit rating. These scores can be mapped to observed default rates to quantify risk. Analysis can be streamlined by accessing a database of over 58,000 pre-scored entities, dating back over 15 years.

Create an early warning system

PDMS is a statistical model that estimates credit default swap spreads to provide an early warning of potential credit changes, capturing the daily market view of a company’s perceived risk.

Streamline workflows

The solutions are available on the S&P Capital IQ Pro platform, a one-stop solution for essential intelligence, offering unparalleled data, cutting-edge productivity tools, news and research. An excel Complement and suite of office tools seamlessly feeds proprietary models and streamlines presentations. Users can access a library of hundreds of ready-to-use templates and templates, or partner with Market Intelligence support analysts to create their own. It is possible to integrate data from Excel into PowerPoint or Word with fewer errors and refresh formulas in Excel with just one click.

Choose from multiple data delivery options

Flexible access via API effectively provides data to internal systems. Data feeds and access via a cloud-based solution are also available.

Key Benefits

Members of the credit risk team subscribed to these offerings and were able to leverage Market Intelligence’s expertise in credit risk assessment, proven models, industry experience and technology innovation. to improve the company’s credit risk assessment process. The solution set provides the automated monitoring and alerting system team members need to minimize any negative impact on their portfolios, and they appreciate having:

  • An objective and coherent framework for measuring and evaluating the credit risk of loans.
  • A dashboard that links empirical default and recovery rates to key explanatory variables both at the ownership/loan level and at the market level.
  • Analytical transparency of the methodology which is backed by granular scoring criteria and comprehensive user and technical documentation.
  • Outputs (credit scores) that are mapped to S&P Global Market Intelligence PDs and broadly align with credit ratings issued by S&P Global Ratings.
  • The ability to make adjustments to financial and macroeconomic inputs according to their own perception of risk.
  • production trial to help support the successful adoption of Credit Analytics and provide insight into the model’s methodology, features, functionality, and how to interpret the results.
  • An effective and easy-to-use approach with broad coverage of companies and geographies, given exposure to multiple countries and industries.
  • Flexible product delivery channels support the automation and rapid integration of credit risk models into their risk management framework.
  • Additional time for customer-facing activities because the maintenance of the Credit Analytics models is managed by Market Intelligence.

Click here to learn more about S&P Global Market Intelligence’s credit analytics solution, and click here to learn more about credit scorecards.

[1] “Property In Transition: Slowing Economies and Shrinking Demand Pressure the Credit Outlook for Office Landlords”, S&P Global Ratings, September 12, 2022, le slowing-economies-and-declining-demand-put-pressure-on-credit-outlook-for-office-tenants-12494303.

[2] S&P Global Ratings does not contribute to or participate in the creation of credit ratings generated by Market Intelligence. Lowercase nomenclature is used to differentiate S&P Global Market Intelligence credit model scores from credit ratings issued by S&P Global Ratings.

[3] All coverage issues as of January 2022.