Learn a structured approach to analysing business risk in a finance and leasing company and understand the risks associated with different business models and leasing asset classes
- Franchise: Understanding the risk of differing business models and reliance on parent companies
- Benefits of leasing and key sector terminology
- Importance of understanding asset class variations on residual value risk
- Exercise: Recognising different NBFI business models from financial statements
- Purpose payback model: Why and how finance and leasing companies borrow; dependence on debt capital markets and access to refinance; stability and variety of wholesale funding sources
- Case Study: Purpose payback international leasing company
- Perspective on finance and leasing companies: Rating agencies, debt and equity investors and banks
Understand finance and leasing sector drivers affecting company performance and strategy
- Key macroeconomic, sectoral risks and competitive issues affecting finance and leasing sector; structure of finance and leasing industry in Europe
- Differing approaches to regulation and supervision in EU
Understand the key areas to analyse the financial strength and risk of finance and leasing companies and how accounting approaches affect financial disclosure
- Shareholders: Risks and benefits of financial and business support in captive finance companies
- Statement logic: Key income statement and balance sheet items, accounting policies for delinquencies
- Business risk: Use of key ratios to assess quality of lease and loan book, reserve adequacy, IFRS 9 Vs US GAAP accounting impacts, lagged non-performing loan analysis, owned versus managed book, residual value risk
- Issues specific to leasing companies: Types of leasing companies, residual values, cash flow; key ratios for peer group of leasing companies
- Operating versus finance leases and impact of IFRS 16
- Off-balance sheet funding; retained interests, mortgage servicing rights and gain on sale accounting from securitisation
- Case Study: Business risk for an international leasing company
- Funding risk: Gap management, availability of contingency funding, liquidity and capital adequacy
- Impact or CRD IV/Basel III on leasing subsidiaries; risk mitigation of lease models and asset classes
- Performance risk: Balancing risk and return; income stability and expense control
- Case Study: Financial risk and performance analysis for an international leasing company
- Critical management issues and early warning signals for finance and leasing companies; processes and systems, market knowledge, strategy
Apply a structured approach to the credit analysis of securities companies and compare this with the perspectives of regulators, rating agencies and debt and equity investors.
- Business models and risk profiles of differing securities companies
- Purpose payback model – key issues in debt and counterparty exposures to securities companies
- Case Study: Purpose Payback considerations for a securities company.
- Perspective on securities companies: Regulators, rating agencies, debt and equity investors
Understand the impact of macro competitive and regulatory issues on risk profile and strategy.
- Securities markets: Foreign exchange, equity, fixed income, futures and other derivatives, commodities, etc.
- Differing business models: Broker, broker dealer, wholesale, retail and internet based
- Exercise: Identifying risks in brokerage companies
- Regulation and supervision: Focal points of international, regional and local regulation; compare and contrast key markets.
Understand the key strategic, corporate governance and risk management challenges of securities companies.
- Shareholders: Quality of financial and business support
- Strategy, risk management (VAR and other models)
- Corporate governance and key man issues
- Exercise: Corporate governance in a securities company
- Operational risk challenges.
Benchmark key performance indicators of different types of securities companies in order to identify both strong and weak performers and recognise early warning signals of credit deterioration.
- Statement logic: Matching business model to expected financial statements; key accounting policies on fair valuation; risk of window dressing
- Performance risk: Revenue sources, earnings volatility and cost control
- Case study: Performance indicators for a global securities broker.
- Business risk: Risk profile of broking, trading underwriting, advisory, settlement and clearing
- Market risk/asset quality: Modelling market risk, securities haircuts, fair value techniques, off balance sheet exposures
- Counterparty credit risk in brokerage and derivatives activities
- Case study: Business risk indicators for a global securities broker.
- Financial risk: Managing funding stability and liquidity risk
- Capital adequacy: Regulatory and analytic tools to assess the strength of capital and the risks of leverage; net capital, working capital and core capital
- Case study: Financial indicators for a global securities broker.
Introduction to a structured approach to fund and fund manager analysis.
- Purpose of transaction and sources of payback: Who is the counterparty? What assets or derivatives are being financed? How will the transaction be settled or the repaid at maturity?
- Risk analysis approach: Operating environment, financial fundamentals and management
- Exercise: Purpose and payback funds and fund managers
- Information sources: Prospectus, financial & portfolio statements.
- Fund ratings: Rating agencies, Morningstar and other ratings
Differentiates funds types encountered in the industry by their structural, legal and jurisdictional features.
- Structure and legal status of funds and managed accounts; partnerships, corporations, segregated accounts
- Types of fund, financial products used and risk profile – mutual funds (incl. UCITS, ICVCs, FCPs, OIECs and SICAVs), managed accounts, tracker and exchange traded funds (ETFs), smart beta, umbrellas, closed-ended funds and investment trusts, REITs, private equity, fund of funds, master feeders, hedge funds
- Investment strategies: Risk profile of strategy, policies, practices and restrictions
- Goals: Absolute versus benchmarked returns; Alpha versus beta; Minimising correlations
- Fee structures: Upfront and performance; high water marks
- Techniques to optimise risk adjusted returns: Leverage, derivatives and short selling
- Traditional strategies: Fixed income (money market, bond), equity and growth, value and Multi-asset strategies
Identifying risk profiles and trading approach of different alternative strategies; risk and return characteristics of alternative strategies; uncorrelated returns, volatility vs return, drawdown statistics; directional vs relative value strategies
- Global Macro
- Long/short equity
- Emerging Markets
- Equity market neutral
- Fixed income arbitrage
- Convertible arbitrage
- Event driven: Distressed debt
- Event driven: Risk/merger arbitrage
- Managed futures/Commodity Trading Advisers
Review macro, competitive and regulatory drivers of the retail and alternative/hedge-fund sectors.
Macro and competitive drivers
- Competitive drivers in the industry
Regulation and supervision
- Regulation and supervision by region
- Mutual funds - investment and leverage limits, disclosure
- Fund manager regulation; capital adequacy, licensing, business practices
- Money Market fund reform in EU and US: CNAV, VNAV, LVNAV
- Exercise: Assessing regulatory framework: Offshore registrations, listings, fund manager domicile
Impact of regulation:
- UCITS and Alternative Investment Fund Managers Directive in the EU
- 1940’s Investment Companies Act and Dodd-Frank Act in the US
- Proposed EU Investment Firms Regulation (IFR) and NBNI G-SIFI systemic risk proposals
Benchmark key performance indicators for different types of fund to identify both strong and weak performers.
- "S": Size – reviewing size, diversification and market position of fund
- "M": Market risk – volatility measures e.g. standard deviation, VaR
- "A": Asset quality – liquidity and valuation of assets, haircuts
- "L": Liquidity – managing redemption risk
- "L": Leverage – use of financial and derivative/synthetic leverage, UCITS leverage restrictions
- "P": Performance – bench marking performance. NAV measures, Sharpe ratio
- Case study: Assessing the financial strength of a liquid alternative fund using SMALLP approach
Evaluate the roles and responsibilities of key parties to a fund and assess the financial strength of a fund manager.
- Roles and responsibilities of various parties: Manager, trustee, directors, administrator, custodian etc.
- Risk profiles of different business models: Institutional, retail, wealth management.
- Due diligence fund manager: Business structure, independence and controls, investment process, risk management, communication
- Financial Overview: Brief overview of performance measurements; cash-flow analysis; balance sheet strength and rating agency benchmarks