Credit deterioration

Collateral cover is now calculated with reference to market value as well as nominal value, enabling greater transparency and precision in the calculation of cover. Both these amendments benefit the Pfandbrief investor in the event of the insolvency of a mortgage bank, there would be no netting of derivatives, which would therefore continue to protect the cover pools and allow the banks to hedge against adverse market conditions that could cause their paper to suffer credit deterioration. 

This distinction between the two translated, until recently, into very little in practice. However, as the mortgage banks, in common with all German banks in the latter half of 2002, experienced significant credit deterioration these different approaches have become far more apparent. Pfandbrief paper from the same issuer is now rated differently by the two main rating agencies for example, Moody s now rates AHBR s mortgage-backed bonds A1 whereas S P still maintains a triple-A outlook. 

Emission reduction credits can also be used to offset emissions increases under New Source Review, Prevention of Significant Deterioration, and Base Realignment and Closure. 

Covered bondholders, in the event of issner insolvency and provided that the covering assets continue to meet regulator requirements, will still receive interest and principal payments according to the contractual dates (with the exception of Spain). However, certain credit events such as deterioration in the quality of the underlying assets for example, would trigger the acceleration of ABS/MBS payments. 

This is notably different from Pfandbriefe where bondholders have an eventual direct recourse to non-eligible assets if cover assets are insufficient to cover their claims and become pari passu with other senior unsecured creditors. Along similar lines, in case of insolvency of an originating credit institution, asset replenishment and/ or substitution is no longer possible, which leaves the SCF fully exposed to asset quality deterioration and repayment, and ensuing cashflow mismatches. 

In this example, the dynamic spread account builds up only to approximately 1.6% of the transaction size, which is well below the target level of 5%. These two examples highlight the importance of the originator s ability to service the receivables pool effectively and, as such, avoid a rapid deterioration in the performance of the collateral. An originator that follows strict credit underwriting procedures and has experienced staff servicing accounts that enter a state of delinquency... 

Declines in equity market values tend to place upward pressure on swap spreads. A decline in equity market values deteriorates the overall credit health of the banking sector, because it reduces collateral value in the entire system. 

In 2002 credit quality deteriorated, reflected in the increased share of lower-rated bonds in the indices (see Exhibits 25.5 and 25.6). In particular, we note that the proportion of triple-B rated bonds in the iBoxx Euro... 

First, the event of new supply may be symptomatic of deterioration in credit quality of the issuing company and/or sector (as in the case of the telecom and auto sectors). Second, some investors have a sector and name limits, hampering demand, resulting in wider spreads. Third, new... 

Gup and Brooks (1993) noted that swaps credit risk, unlike their interest rate risk, could not be hedged. That was true in 1993. The situation changed quickly, however, in years following. By 1996 a liquid market existed in instruments designed for just such hedging. Credit derivatives are, in essence, insurance policies against a deterioration in the credit quality of borrowers. The simplest ones even require regular premiums, paid by the protection buyer to the protection seller, and make payouts should a specified credit event occur. 

External credit enhancement still leaves a CMO exposed to credit risk—the risk associated with the insurance provider. That is, the issue can be downgraded because of a deterioration in the credit quality of the provider. Investors who purchase nonagency CMOs must ensure that they are satisfied with the credit quality of the third-party guarantor, as well as with the quality of the underlying mortgage pool. 

Another important measure for financial companies is liquidity. Due to the nature of the industry and the capital structure of banks, liquidity—or more accurately the lack of liquidity—is the primary reason behind banking failures. A bank that is unable to raise funds sufficiently quickly to meet demand will most probably fail, and certainly so if external support is not provided. An inability to raise funds may arise due to internal factors, such as a deterioration in earnings or a very poorly performing loan book, connected perhaps with a downgrade in credit rating, or from external factors, such as a major structural fault in the money markets. For credit analysis purposes, the traditional liquidity measures are ... 

However the economic deterioration of the 2000s decade in Zimbabwe caused a high level of uncertainty, shortage of foreign currency and increased country risk. Consequently, local firms found it difficult to access trade credit from suppliers for APIs and excipients. The dearth of trade credit and reliance on expensive bank finance throttled financial breathing space for the companies. 

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