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Putting all things together : how is the Loss Given Default – LGD – of my credit portfolio affected by the domino effect ?

In the Eurovision LGD Contest post Algosave shows that BP plc forward-looking Loss Given Default (LGDs) are the highest among 10 western major integrated oil and gas producers.

In the Credit Portfolio domino effect post, Algosave Fintech also delivered powerful insights into issues of credit dependencies, for instance by showing which of those 10 corporates was the least “toxic” in the portfolio.

Putting all things together, and putting Algosave FinTech to the test : when another corporate of the portfolio defaults, (1) what happens to BP relatively high LGDs, and (2) is BP – then – in a high, average or low LGD regime ?

For instance, let’s focus on what happens to BP LGDs if Chevron was to default. Why Chevron ? because it is the “toxiest” corporate for BP plc. Indeed, If Chevron was to default, Algosave Fintech shows that BP 5year PD would jumps from its current 3.5% to 11.8% = more than 3.7 times. Whereas, BP 5year PD only jumps 2.2 times on average with the other 8 corporates of the portfolio.

First, let’s remind ourselves how BP 5year unsecured LGD distribution looks like (this distribution can be found in the EUROVISION LGD Contest article).

Now the first good piece of news and the answer to the first challenge : what happens to BP LGD distribution when Chevron defaults ?

  • Algosave FinTech shows that BP median 5-year unsecured conditional LGD (if Chevron was to default) is 8% lower that BP “standalone” LGDs.

Hence, also the answer to the second question : when Chevron defaults, is BP is a low, average or high LGD regime ?

  • Algosave FinTech shows that upon Chevron default, if BP was to also to default, it would – on average – be in a relatively lower LGD regime.
  • the BP LGD “standalone” and “conditional” 5-year unsecured LGD distribution shows exactly that.
  • In red (and on the left hand y-axis) BP “standalone” LGDs, more centered around its mean. In blue (and with the right hand y-axis) BP “conditional” LGDs (if Chevron defaults), with a larger left-hand tail, illustrating the lower LGD regime if BP was to go bankrupt as well.

Algosave can address these complex challenges thanks to the high granularity of its big data universe. Also, current credit model are either calibrated on Equity Capitalization (Option-type models) or on Bond/CDS (reduced form models). Algosave model takes it all : it is both calibrated on Equity as well as on bond spread data (when available). Departing from “thru the cycle” ratings, this gives Algosave FinTech its refreshing “live” and Point in Time flavor.

All the best. Algosave Team – 01/06/2018

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