Diversification of Credit Risk for People with Fixed Income

credit risk management system

The tension in investment decision making is between the risk and its return. The important perspective is that in the reach for yield, the opportunities for missteps are countless. The long-term rates are unlikely to rise and there is an ongoing opportunity with the fixed income market. Lately, the Calamos product management and analytics team are being asked to consult on fixed income allocations that are heavily tilted towards the credit risk.

According to the Calamos Vice President and Team head, Shawn Park, “Many products generate meaningful yield but they must reach for it in lower quality credit, often overlapping with allocations specific to high yield and bank loans. There is also a heavy dose of securitized overlap.” Furthermore, he added that “While securitized products provide a yield advantage over investment grade quality, over diversifying in assets class is not recommended.” Besides, bank loan funds, which are also known as the floating rate funds have applied now due to the rising LIBOR. The park reminds advisors that are the types of funds arrived from volatility and potential for larger drawdowns. The bank loans are highly correlated to the credit spread cycle and the credit risk is the primary risk to the bank loans.

In addition to this, there are market trends that are based on the current market conditions and constitute the judgment. These factors include estimates, forecasts, and statements of financial market and opinions that are subject to change without notice. The views and the strategies described may not the suitable for all the investors. For the reference to specific securities, assets classes, and financial markets all are for illustrative purpose only. These are not resulted to be and should not be included as recommendations and suggestions. The main risks of investing in the market neutral income fund involve around the equity securities risks, which consist of market price declining in general and convertible securities. The risks consisting of the potential for a decline in value during the period of rising interest rates and the risk of the borrower to miss payment synthetic convertible instruments risk, covered call writing risk, short sale risk, credit risk, liquidity risk, and many others.

The current performance date which represents the past performance displays no guarantee of future results. The current performance may be lower or higher than the performance quoted. The principal value and return of an investment will fluctuate so that the sales and the shares may be worth more or less than their original price when redeemed. The performance reflected at the NAV which does not include the fund’s maximum front-end sales but had been included in the fund’s return.

The Morningstar market neutral category reflects the investment attempt to eliminate the risks of the market by holding half of the assets in long positions in stocks and the remaining half in short positions. It represents the fund that invests primarily in floating rate bank loans instead of bonds. So, in exchange for their credit risk, they are offering high-interest payments that generally float above a common short-term benchmark. Thus, before investing into any bonds and shares, you need to carefully consider the fund’s investment objective risks, expenses, and charges.

Credit Risk Management- Key to the Holistic Growth of the Business

credit risk management

Are you looking for the intact credit risk strategy for your business? It is kind of challenge for the firms. Let me tell you that efficient Credit Risk Management can help you to achieve multiple objectives of the business. It can take your business beyond the regulatory requirements and development goals.

Here, in this blog, we discussed some crucial basics of Credit Risk and its effective management in the Financial Institutions. Diligent management of credit problem is becoming a strategic focus of the business.

What is Credit Risk?

Credit Risk refers to the risk that arises from borrower’s or counterparty’s incompetency to meet payment terms as stated in the invoice and defaulting on the same. (3rd party debt collection and bad debt collection terms). Credit collection is the major issue faces by most of the financial institutions. A Greater part of firm’s credit risk is emerged out of its lending activities like Unfunded Loan Commitments, Outstanding Eases and Loan Amount, Letter of Credits, Trading Accounts Assets, Financial Guarantees, Account Receivables Outsourcing and Derivative Assets. Credit risk is also associated with interbank transaction activities, acceptance and trade finance, investment settlements and retail banking.

How it works?

Debts risk management is set of activities conducted to minimize the loss by properly analyzing the loan loss reserves and bank’s capital at the given point of time. It is essential to form and execute a radical credit policy balance the risk involved in credit appraisal activities. It is a top management’s responsibility to formulate a strategy for credit risk reduction and management along with improvement in credit policies and risk monitoring practices.

Business information reports and credit reports should be precisely examined to set credit limits and control the risk in all kind credit provision activities. Hence, it is advisable to the financial institutions to monitor all the aspects of the credit risk management for achieving the overall growth and competitive advantage.

Brief Synopsis of Business Information Reports are :
Our Credit Rating process is highly technical in nature with a fact based approach. Parameters considered are:

  • Management details
  • Operational details
  • Financials Statements
  • Financial Ratios
  • Industry standings
  • Financial institutions feedback
  • Credit rating history
  • Regulatory filings
  • Database and Desktop searches

  • Our Approach

    We ensure that all clients are rated in a consistent manner with the Credit report (aka Business Information Report) which involves following aspects:

  • Credit Terms or Prepay Terms
  • In case, Credit Terms, Credit Lines will be recommended