You are the Head of CVA desk trading ?
ALGOSAVE issuer database is a tool that lets you easily gain deeper understanding of critical component of CVA pricing. It will even allow you to check how macro-economic scenarios affect each corporate LGD.
Use ALGOSAVE COUTERPARTY DATABASE and gain COMPETITIVE EDGE in CVA pricing.
Indeed, pricing CVA charge requires a deep and multi-disciplined experience and understanding of OTC derivatives pricing. Although Loss Given Default – LGD – is a critical CVA charge component, there are few reliable sources of information and pricing on the matter. Meaning that most of the time 60% or 75% standard LGD will be used.
ALGOSAVE bridges this gap and offers counterparty and seniority specific LGD term-structure which is hereby illustrated thru a quiz.
Imagine your bank is at the forefront of energy financing.
Its clients are the “Majors” of this world : BP, Exxon, Royal Dutch Shell, Total and also Husky Energy, Chevron and ENI Spa.
Most OTC transactions with those counterparties are not collateralized which means that precise CVA pricing becomes a competitive advantage.
Quiz : Which of those 7 giants deserves has a rock-bottom-low 15% Loss Given Default, in every economic scenario and on all the following 3 credit exposures ?
- a one-year subordinated CVA charge.
- a 10 year secured Revolver Credit Facility,
- a 10-year senior-unsecured bond,
Here are a few – misleading 🙂 – pieces of information to “help” you answer the quiz.
Ok…you are probably – and naturally – thinking EXXON, with its highest credit rating and lowest Net Debt to EV ratio. Well, in bad macro-economic scenario, EXXON 10-year senior unsecured bond will cost its capital providers a heavy LGD : as you can see on the here-under candlestick chart, 50% of EXXON 10-year unsecured LGD distribution stands between 15% and 31%.
Let’s stick to credit rating – for what it is worth – and examine Chevron. Chevron unsecured LGD in a bad economic scenario, is unsurprisingly worse than EXXON : 50% of Chevron 10-year unsecured LGD distribution stands between 15% and 40% with a median at 29%.
Ditto for Royal Dutch Shell which shows very similar 10-year unsecured LGD distribution albeit with a slightly lower median at 20%
Surprisingly – or not – things are getting worse both for TOTAL as well as for BP. Indeed, 50% of TOTAL 10-year unsecured LGD distribution stands between 29% and 43% with a median at 36% in bad macro-economic scenario.
Now, watch-out for BP 5-year unsecured LGD distribution which is worse even in the OECD concensus macro economic scenario ! Indeed, 50% of BP 5-year unsecured LGD distribution stands between 43% and 50% with a median at 46% even in such a benign macro scenario.
As a side note, and admittedly, all those LGDs are still far lower than standard CDS-market 60% LGD. Already offering an unfair competitive advantage for anyone pricing a credit exposure.
As another side note, the next box-chart will probably raise a few eyebrows if BP was to ask for a subordinated unsecured credit line. Indeed in almost all cases, BP subordinated LGD stands at a solid 100%. Now, that is even higher that the standard CDS-market 75% LGD for subordinated credit exposure. Except in very good macro-economic scenarios (the green bars).
Interestingly – and despite its lower credit rating – ENI’s LGDs are relatively low : they resemble those of EXXON in all macro economic scenarios.
But, of course, ENI forward looking PD curve are a lot different and would push any RAROC or Expected Credit Losses computation higher than those of EXXON
Now the answer to the quiz ? The only corporate among those 7 majors which will always show rock-bottom-low 15% LGD in the here-above 3 credit exposure is : Husky Energy, the lowest credit rating of all.
