Price CVA charge with counterparty and seniority specific Loss Given Default term structure

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.

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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.

Ask for your private access to ALGOSAVE ISSUER DATABASE, and check how you gain competitive advantage in CVA pricing thanks to counterparty and seniority specific Loss Given Default term structure.