Non-Bank Financial Institutions

Course Objectives
The overall goal of this case study based workshop is to give participants a structured approach to the credit analysis of different types of non bank financial institution.
Participants will be equipped to:
Distinguish the key business risks, financial indicators and accounting issues by sector, business line, type of institution or fund structure
Use market indicators, quantitative and qualitative analysis to identify strong and weak performers and detect early signals of changing credit quality
Appreciate how economic, structural, competitive and regulatory issues impact strategy and financial health
Dissect financial statements to uncover key credit issues and the impact of differing accounting policies
Structure transactions to minimise credit and other risks.
Target Audience
A case study based credit workshop designed for commercial, investment banking, fixed income, and regulatory and other risk professionals responsible for credit risk management, origination, investment, sales and trading, audit, regulation or underwriting. The workshop assumes a basic understanding of financial markets, products and accounting.
FitchTraining also offers more detailed counterparty specific workshops on Securities Companies, Funds and Fund Managers, Regulated Funds and Fund Managers, Hedge Funds and Central Counterparties, Clearing Houses and Exchanges. Some of these workshops have considerable overlap with this workshop.
Content
MODULE I: SECURITIES COMPANIES
ANALYTIC OVERVIEW
Section aims: apply a structured approach to the credit analysis of securities companies and compare this with the perspectives of regulators, rating agencies and debt and equity investors.
Perspective on securities companies: regulators, rating agencies, debt and equity investors
Purpose payback model key issues in debt and counterparty exposures to securities companies.
OPERATING ENVIRONMENT
Section aims: understand the impact of macro competitive and regulatory issues on risk profile and strategy
Securities markets: foreign exchange, equity, fixed income, futures and other derivatives, commodities, etc.
Exercise: securities company risk analysis
Regulation and supervision: focal points of international, regional and local regulation; compare and contrast key markets.
FINANCIAL FUNDAMENTALS
Section aims: benchmark key performance indicators of different types of securities companies in order to identify both strong and weak performers and recognise early warning signals of credit deterioration,
Statement logic: matching business model to expected financial statements; key accounting policies on fair valuation; risk of window dressing
Performance risk: revenue sources, earnings volatility and cost control
Business risk: risk profile of broking, trading underwriting, advisory, settlement and clearing
Market risk/ asset quality: modelling market risk, securities haircuts, fair value techniques (FASB 154) off balance sheet exposures
Counterparty credit risk in brokerage and derivatives activities
Financial risk: managing funding stability and liquidity risk
Capital adequacy: regulatory and analytic tools to assess the strength of capital and the risks of leverage; net capital, working capital and core capital
Illustration case study: regional broker
Early warning signals: financial and non-financial indicators.
MANAGEMENT, FRANCHISE AND OWNERSHIP
Section aims: understand the key strategic, corporate governance and risk management challenges of securities companies.
Differing business models: broker, broker dealer, wholesale, retail and internet based
Strategy, risk management (VAR and other models)
Corporate governance and key man issues (for smaller Cos.)
Exercise: failed corporate governance
Operational risk challenges
Shareholders: quality of financial and business support
Case study: lessons learned from a failed securities company.
MODULE II: FINANCE AND LEASING COMPANIES
ANALYTIC OVERVIEW
Section aims: apply the purpose payback model to understand the key credit issues of finance and leasing companies.
Key credit issues with finance and leasing companies
Purpose payback model: dependence of finance companies on debt markets and refinance; warehouse and borrowing base facilities and other structural issues.
OPERATING ENVIRONMENT
Section aims: understand the impact of macro competitive and regulatory issues on risk profile and strategy
Key risks and competitive issues by sub-sector: sales finance, direct finance, captive finance, equipment finance and leasing, credit cards and mortgages
Exercise: distinguishing the business models of finance cos.
Impact of minimal regulation and supervision: legal framework of secured lending.
FINANCIAL FUNDAMENTALS
Section aims: benchmark key performance indicators of different types of finance and leasing company in order to identify both strong and weak performers and recognise early warning signals of credit deterioration.
Statement logic; accounting policies for income, receivables, delinquencies and leases (finance versus capital leases)
Business risk: financial tools to assess quality of lease and loan book; reserve adequacy, owned vs. managed book; residual risk
Case study: large regional finance and leasing company
Funding risk: stability and variety of wholesale funding sources, gap management, availability of contingency funding, liquidity and
Securitization: benefits and risk of off balance sheet funding vehicles; residual risk, mortgage servicing rights and gain on sale accounting
Capital adequacy: leverage and solvency benchmarks
Exercise: capital standards for finance companies
Performance risk: balancing risk and return; income stability and expense control
Early warning signals: lessons learned from a failed finance Co.
Case study: a finance company in financial distress.
MANAGEMENT, FRANCHISE AND OWNERSHIP
Section aims: evaluate the business model of different types of finance and leasing company to ensure they have adequate franchise value to succeed.
Franchise: assessing the validity of the business model, residual marketing, processes and systems, strategy, etc.
Case study: large international leasing company.
MODULE III: REGULATED FUNDS AND FUND MANAGERS
INDUSTRY OVERVIEW
Section aims: differentiate the key features and investment strategies of regulated funds.
Orientation
Types of fund: pension funds; regulated mutual funds, managed accounts, closed ended funds and investment trusts, tracker and exchange traded funds (ETFs), fund of funds, master feeders, REITs etc.
Structure and legal status of funds and managed accounts.
Investment strategies
Investment strategies: risk profile of strategy, policies, practices and restrictions
Traditional strategies: fixed income (money market, bond, municipals) equity and specialist funds; growth, value and balanced strategies; capital guaranteed structures
Alternative investment strategies: use of derivatives and leverage; liability driven investment (LDI) strategies for pension funds.
ANALYTIC OVERVIEW
Section aims: apply the structured approach to analysis to fund transactions in order to recognise the key challenges of exposures to funds.
Structured approach to analysis
Purpose of transaction and sources of payback: Who is the counterparty? What assets or derivatives are being financed? How will the transaction be settled or debt repaid at maturity?
Perspectives on analysis
Information sources: prospectus, financial statements, portfolio statements.
RISK ANALYSIS
I. OPERATING ENVIRONMENT
Section aims: understand the macro competitive and regulatory drivers of performance, strategy and financial strength.
Macro and competitive drivers
Sub-sectors of the industry: institutional, retail, wealth management
Competitive drivers: sources of advantage
Regulation and supervision
Regulation and supervision by region (focus depends on location of workshop)
Mutual fund regulations: investment and leverage restrictions, disclosure
Pension fund regulation: funded status; investment limitations,
Fund manager regulation; capital adequacy, licensing, business practices.
II. FINANCIAL FUNDAMENTALS
Section aims: benchmark key performance indicators of different types of finance and leasing company in order to identify both strong and weak performers and recognise early warning signals of credit deterioration.
S : Size: reviewing size, diversification and market position of fund
M : Market risk: volatility measures e. g. standard deviation, VaR
A : Asset quality: liquidity and valuation of assets, haircuts
L : Liquidity: redemption risk on open ended funds
L : Leverage: use of financial and derivative leverage; funded status for pension funds
P : Performance: bench marking performance NAV measures, information and Sharpe ratios.
III. MANAGEMENT
Section aims: evaluate the roles and responsibilities of key parties to a fund with a focus on the fund manager.
Key parties
Roles and responsibilities of various parties: manager, trustee, directors, administrator, custodian etc.
Due diligence fund manager
Business structure: staff and organisation: experience levels; size, affiliation
Independence and controls: affiliation; conflicts of interest
Investment process: structure and implementation of portfolio management decision making
Risk management: operational, market, credit and regulatory
Communication: disclosure and client relationships.
Fund manager as counterparty
Purpose payback: why do fund managers borrow and how do they service debt
Risk profiles of different business models
Financial analysis a) Performance measurement b) Cash-flow analysis c) Balance sheet strength
Early warning signals of troubled credits.
STRUCTURE
Section aims: structure exposures in order to optimise risk reward
Types of risk when dealing with funds - credit, market, operational, reputation
Exposure profile - assessing the appropriateness of the structure in terms of amount, maturity etc.
Ranking - establishing and maintaining a senior position
Safeguards - documentation (e. g. ISDA) and collateral.