Loan Pricing & Structuring Masterclass (Modular Course)
Loan Pricing & Structuring Masterclass (Modular Course)
Starting dates and places
Description
Course Background Against a background of shrinking Net Interest
Margins and tighter capital requirements, banks are seeking to
simultaneously expand their product ranges whilst meeting internal
and external balance sheet management requirements. At the same
time, corporates are facing the challenge of intensifying global
competition. Firms are also increasingly required to comply with
regulatory and accounting best practice requirements, particularly
in the wake of the credit crisis, which has also increased the
uncertainty of funding sources as forms of credit rationing by
banks are increasingly introduced. In today's market, client facing
bankers are required to provide solutions for the …Frequently asked questions
There are no frequently asked questions yet. If you have any more questions or need help, contact our customer service.
Course Background Against a background of shrinking Net Interest
Margins and tighter capital requirements, banks are seeking to
simultaneously expand their product ranges whilst meeting internal
and external balance sheet management requirements. At the same
time, corporates are facing the challenge of intensifying global
competition. Firms are also increasingly required to comply with
regulatory and accounting best practice requirements, particularly
in the wake of the credit crisis, which has also increased the
uncertainty of funding sources as forms of credit rationing by
banks are increasingly introduced. In today's market, client facing
bankers are required to provide solutions for the increasingly
complex requirements of their corporate clients. An additional
layer of complexity is added when financing structures are required
to comply with Shari'a law. Through offering more tailored,
value-added solutions to meet their clients’ financing needs, banks
are looking to move away from competition on price alone and to
adopt a more sustainable business model by ensuring that loan
pricing policies cover both the cost of funds and the cost of
balance sheet capital. From the bank’s treasury perspective, it is
of increasing importance to enhance the use of the available
regulatory capital (interest and fee income) and to more closely
match loan assets to liabilities through securitisation programmes
and bond issuance. In addition to providing attendees with the
knowledge necessary to sell their products and identify client
solutions, this course provides delegates with an understanding of
the issues and opportunities that banks face. The course includes
practical examples to develop loan pricing skills and to increase
confidence in the use of interest rate derivatives to structure
value-added client financing solutions. At the end of the course,
the delegates will have a full understanding of loan pricing from
the perspective of balance sheet management and credit risk.
Building from an understanding of the fundamental role of asset and
liability management (ALM), the course covers the Funds Transfer
Pricing (FTP) process and its pivotal role in pricing liquidity
risk. It provides practical, hands-on pricing, revaluation and risk
analysis of the principal loan structure types, teaching delegates
how to structure loan portfolio assets in order to facilitate their
securitisation for secondary market investors. The course also
provides delegates with a working understanding of interest rate
derivatives in the context of their role in risk management and
loan product structuring. Key learnings: Best practice in loan
pricing calculation to cover funding costs and capital return
requirements Understanding the key issues facing corporate treasury
managers in financing their businesses Developing a working
understanding of trade financing and project financing structures
Principal issues and risks in Treasury Asset and Liability
Management (ALM) Client benefits of financing solutions
incorporating interest rate derivatives and other terms
Understanding how Shari'a compliance impacts the structuring of
financing solutions Deepen understanding of interest market data
and its interpretation in a loan market context Module 1: Loan
Pricing & Structuring, 6-8 October 2014, Hong Kong
Understanding corporate treasury management issues and challenges
Introduction to loan instruments: Principal terms and primary
derivatives Bank Asset and Liability Management and the role of
Funds Transfer Pricing (FTP) Interpretation and derivation of spot
and forward interest rates and bond yield curves Interpretation of
default risk data: Credit spreads and Credit Default Swap (CDS)
premia Minimum loan pricing incorporating cost of funds and
required return on equity capital Application of the term structure
of interest rates: Loan asset valuation Forward looking loan asset
valuation models incorporating credit risk Floating and fixed rate
loan structure and bond valuation analysis Duration risk analysis
of principal floating and fixed loan structures Introduction to
standalone interest rate derivatives: Swaps and interest rate caps
Role of cross currency swaps in corporate funding and risk
management Asset and commodity based lending structures Module 2:
Advanced Loan Pricing & Structured Debt Products, 9-10 October
2014, Hong Kong Derivation and use of longer dated spot interest
rates from bond yields Interest rate derivatives: Purpose, pricing
principles and valuation techniques Introduction to structured debt
products: Asset swaps and synthetic floating rate notes Introducing
optionality: The impact of call options in loan structures Forward
start instruments: Pricing of forward loan and swap facilities
Forward start derivatives: Forward Rate Agreements and Swaptions
Managing counterparty credit risk: Credit Valuation Adjustment
(CVA) Loan portfolio management and risk analysis Structuring and
pricing loan products with Caps, Floors and Collars Using
Non-Deliverable Forwards and Non-Deliverable Swaps in structured
solutions Structuring Shari'a compliant loan products Introduction
to project financing structures and use of swaptions and cross
currency instruments Computer-based exercises Delegates should
bring their own laptops loaded with Microsoft Excel® 2010 or later
to facilitate in-class studies and exercises. Who Should Attend?
Commercial Bankers Loan Product Developers Bank Treasury Management
Analysts Securitisation Structure Analysts Risk Managers Bank
Executive Managers You can attend the comprehensive course which
runs from 6-10 October 2014 or pick from the following modules.
Loan Pricing & Structuring Masterclass (Modular Course) 6-10
October 2014, Hong Kong Module 1: Loan Pricing & Structuring
6-8 October 2014, Hong Kong Module 2: Advanced Loan Pricing &
Structured Debt Products 9-10 October 2014, Hong Kong FTS-Eligible
This programme is approved for listing on the Financial Training
Scheme (FTS) Programme Directory and is eligible for FTS claims
subject to all eligibility criteria being met. Please note that in
no way does this represent an endorsement of the quality of the
training provider and programme. Participants are advised to assess
the suitability of the programme and its relevance to participants’
business activities or job roles. The FTS is available to eligible
entities, at a 50% funding level of programme fees subject to all
eligibility criteria being met. FTS claims may only be made for
programmes listed on the FTS Programme Directory with the specified
validity period. Please refer to www.ibf.org.sg for more
information. Please note that this course is only eligible for FTS
Funding when registering for all modules.
Module 1: Loan Pricing and Structuring Day 1 Introduction Refresher on the business of banking Net interest income Asset and liability management (ALM) The fundamental role of funds transfer pricing Understanding interest rate markets Inter-bank rates, e.g. KLIBOR Government benchmark bond yields, e.g. the IGB curve Corporate treasury management primer The key issues and risks faced by corporates in 2013 Risk management Regulatory and accounting requirements Security of financing Understanding financing from a corporate perspective Inventory financing Trade financing Project financing Key elements of loans Fundamental loan types Bullet Amortising Credit risk pricing inputs Internal credit data External credit rating of borrower Market credit spreads Credit default swap data Tenor Terms Collateral type Covenants Use of funds Leverage ratios Interest payment schedule Options Prepayment Other types of options Caps, floors, collars Loans with embedded call options Forward start facility Benefit to client in reducing refinancing risk Interest rate risk to lending bank Introduction to interest rate derivatives Role of derivatives in client financial risk management Key derivative products Fixed for floating interest rate swaps Basis swaps Cross currency swaps Swaptions Discounting loan cash flows to fair value Loan cash flow structures Bullet Principal at maturity and periodic interest payments Amortising Calculation of present value Time value of money Discount factor Present value of loan cash flow Exercise: Valuing default risk free fixed rate loans – Bullet structure – Principal and maturity and periodic interest payments – Amortising loan structures Loan pricing and valuation input data Loan terms Collateral Sinking fund provisioning Covenants Credit quality Discount rates Deriving appropriate rates from the term structure of interest rates Zero coupon interest rates: Derivation and use Incorporating credit risk into pricing models Bank specific loan pricing factors Internal funding rate Cost of funds Credit risk Cost of capital Operating costs Residual interest rate risk from the interest rate gap Floating rate loans Key concepts Structure Reference rate, e.g. relevant inter-bank rate Loan pricing calculation Loan margin calculation Floating rate loan mechanics Reset dates Implication for interest rate risk Exercise: Minimum loan pricing calculation incorporating required return on bank’s equity capital Day 2 Cash flow estimation Forward interest rates as best estimate of prevailing rates in the future Deriving forward rates from the term structure of interest rates Non-par floating rate loans Valuation Modelling expected floating rate loan cash flows Discounting floating rate loan cash flows to fair value Incorporating credit risk into loan valuation models Exercise: Floating rate loan synthesis – Loan pricing calculation, incorporating default risk – Loan margin calculation – Estimating floating rate loan cash flows from the forward curve – Calculating current fair market value by discounting using the zero curve Case study: The development of Asian debt markets since the Asian Financial Crisis 1. Financial structure, development and economic growth 2. Asian debt markets pre-1997 3. Critical events in Asian debt markets 4. Debt market reform: Response of policymakers since 1997 5. Post-crisis development of Asian debt markets Fixed rate loan and bond analysis How interest rates relate to bond yields Fixed rate loans as bond equivalents Characteristics of bonds Floating rate loan vs. Bond pricing methods Bond price vs. Yield Calculating a bond's price given a known Government benchmark yield and credit spread Calculating a bond's yield from a known price Exercise: Calculation of a bond’s price from the Government equivalent yield plus credit spread and comparing it to the pricing of a loan with the same maturity Fixed rate loan pricing from FTP internal funding rate Revaluation of fixed rate loans due to change in internal funding rate input parameters Day 3 Bond risk metrics and their application to fixed rate loan analysis Duration Convexity Risk dynamics for different loan structures Floating rate Fixed rate Bullet Amortising Principal at maturity and periodic interest payments Exercise: Calculation of fixed loan risk metrics for different loan structures Interest rate swaps Introduction: Fixed for floating - "plain vanilla" - swaps Pricing model inputs The zero curve The forward curve Valuation Fixed leg Floating leg Net value Inception During life of swap when rates change Pricing during a swap’s life Exercise: Pricing an interest rate swap during its life given different interest rate scenarios Asset and commodity-based lending structures Rationale Key types Corporate assets Non-current assets Property Plant Current assets Receivables Inventory Commodity Benefit to borrowers Key types Role in Shari’a-compliant lending Commodity based returns Principal protection Managing commodity risk Equity Key types Convertible Exchangeable Total return swap based on index Equity linked notes Structuring equity linked notes Zero coupon bond plus option Asset based loan pricing models Forward start loan products Pricing intrinsic value of forward start loan from the forward curve Forward Rate Agreements (FRAs) FRA pricing calculation Exercise: Pricing forward rate agreements Module 2: Advanced Loan Pricing and Structured Debt Products Day 1 Interest rate derivatives: Purpose, pricing and valuation Risk management Lender perspective Prepayment risk factors Interest rate Borrower credit rating improvement (credit migration) Availability of equity refinancing Credit risk Fixed rate loan duration risk Floating rate loan basis risk Borrower perspective Floating rate borrowers: Risk of rising rates Fixed rate borrowers: Opportunity cost of falling interest rates Foreign currency borrowers Accessing international capital markets FX rate risk Foreign currency interest rate risk Principal derivative types Interest rate swaps Fixed for floating Basis swaps, e.g. deposit rate basis into 3 month JIBOR Forward start swaps Cross Currency Swaps (CCS) Purpose Hedging Enabling clients to access cheaper borrowing Comparative borrowing advantage Types Fixed for fixed CCS Fixed for floating CCS Pricing Pricing at inception Valuation during a CCS's life Analysis of clients' financing and currency risk management requirements Asset cash flows, e.g. income from commodity assets in US$ Liability cash flows, e.g. interest payments in local currencies Exercises: Structuring cross currency swaps – Hedging – Enabling clients to access cheaper borrowing – Comparative borrowing advantage Optionality in loan structures Fundamental concepts Payoff profiles Prepayment clauses American-style European-style Default as an option Probability analysis of uncertain outcomes Central role of volatility Other key factors including Time to exercise date Strike rate Current rate Loans with embedded options Structure, e.g. Bermudan Borrower call option, e.g. full or part prepayment option Yield analysis Yield to call Yield to worst Exercise: Calculating yield to worst Valuation Value of non-callable loan less value of option Interest rate lattices Binomial trees Forward rates Interest rate volatility Risk analysis Impact of optionality Effective duration Lender put option (right to enforce early redemption of loan) Pricing optionality Key concepts Volatility Boundary conditions Time to exercise date Strike rate Current rate Pricing models for interest rate related options Forward rates Assumed probability distribution Summary: How enhanced loan features meet clients' needs Fulfilling financing requirements Minimising overall cost of financing Exercise: Pricing a fixed loan with a call option using a three period binomial option pricing model: – Non-callable loan – Call option – Callable loan Day 2 Swaptions Swaptions as an option to exercise swap agreement at a given point in the future Estimated cash flow profile Pricing: The Black (1976) model Exercise: Valuation of a swaption Caps, floors and collars Understanding the purpose of interest rate caps, floors and collars Benefit to client of interest rate caps Benefit to bank of interest rate floors Financing cost reduction effect for client of Collar vs. Cap Interest rate caps as a series of caplets Pricing caps, floors and collars Exercise: Valuation of an interest rate caplet Counterparty risk in derivative transactions: Credit Valuation Adjustment (CVA) Pricing data sourcing and derivation Deriving pricing factors from internal and external sources Bootstrapping: Deriving discount rates for loan pricing from market data Interpolation: Derivation of, e.g. 3 and 6 month rates from longer term rates Projection: Derivation of 18 month rates from annual rates Internal ratings approach Bond market yields and credit spreads Credit Default Swap (CDS) markets CDS premia interpretation Translating CDS premia into discount factors to price loans Deriving minimum loan pricing levels: Opportunity cost analysis Bond market yield curves CDS markets Exercise: Deriving discount rates from debt markets and using them to price a loan Loan portfolio analysis and management Understanding and managing loan portfolio risk Correlation risk Borrowers Collateral Effective diversification Residual risk factors Interest rate Collateral values, e.g. property Equity markets Commodity markets Exercise: Hedging loan portfolio duration risk using interest rate derivatives Structuring, pricing and risk management of Shari’a compliant loan products Review of Islamic banking principles and structures Overview of key Shari'a financial principles Usury: Riba Uncertainty of outcome: Gharar and Maysir Shared risk-taking: Mukhatarah Forbidden activities: Haraam Fundamental concepts in contemporary Islamic finance Sharing of risk between contracting parties Cost plus mark-up (Murabahah) Profit sharing (Mudharabah) Joint venture (Musharakah) Payment of religious tax (Zakat) Case studies: Translating Shari'a guidelines into loan products Deferred payment structures, e.g. Bai’ Bithaman Ajil (BBA), Bai’ al’ inah Collateral-based lending, e.g. Murabahah Leasing plus sale structure, e.g. Ijara wa Iqtina Trade financing, e.g. Istisna, Bai’ Salam Floating rate and repayment instalment structures, e.g. Musharakah Mutanaqisah (MMQ) Joint venture (risk sharing) structures, e.g. Musharakah Project financing Introduction Due diligence: Assessing the risk of projects Understanding the roles of the participants and identifying opportunities Financing and risk management Project financing pre-contract requirements and hedging Structured financing during project SPV lending structures Using tailored swaps to structure project financing lending transactions Swaptions Forward start swaps Amortising swaps Accreting swaps Risk management Documentation Collateral and security Project financing-based Islamic bond structures Sukuk investment into the assets of the project Meets with the requirements for risk-sharing and asset ownership rather than debt
Module 1: Loan Pricing and Structuring Day 1 Introduction Refresher on the business of banking Net interest income Asset and liability management (ALM) The fundamental role of funds transfer pricing Understanding interest rate markets Inter-bank rates, e.g. KLIBOR Government benchmark bond yields, e.g. the IGB curve Corporate treasury management primer The key issues and risks faced by corporates in 2013 Risk management Regulatory and accounting requirements Security of financing Understanding financing from a corporate perspective Inventory financing Trade financing Project financing Key elements of loans Fundamental loan types Bullet Amortising Credit risk pricing inputs Internal credit data External credit rating of borrower Market credit spreads Credit default swap data Tenor Terms Collateral type Covenants Use of funds Leverage ratios Interest payment schedule Options Prepayment Other types of options Caps, floors, collars Loans with embedded call options Forward start facility Benefit to client in reducing refinancing risk Interest rate risk to lending bank Introduction to interest rate derivatives Role of derivatives in client financial risk management Key derivative products Fixed for floating interest rate swaps Basis swaps Cross currency swaps Swaptions Discounting loan cash flows to fair value Loan cash flow structures Bullet Principal at maturity and periodic interest payments Amortising Calculation of present value Time value of money Discount factor Present value of loan cash flow Exercise: Valuing default risk free fixed rate loans – Bullet structure – Principal and maturity and periodic interest payments – Amortising loan structures Loan pricing and valuation input data Loan terms Collateral Sinking fund provisioning Covenants Credit quality Discount rates Deriving appropriate rates from the term structure of interest rates Zero coupon interest rates: Derivation and use Incorporating credit risk into pricing models Bank specific loan pricing factors Internal funding rate Cost of funds Credit risk Cost of capital Operating costs Residual interest rate risk from the interest rate gap Floating rate loans Key concepts Structure Reference rate, e.g. relevant inter-bank rate Loan pricing calculation Loan margin calculation Floating rate loan mechanics Reset dates Implication for interest rate risk Exercise: Minimum loan pricing calculation incorporating required return on bank’s equity capital Day 2 Cash flow estimation Forward interest rates as best estimate of prevailing rates in the future Deriving forward rates from the term structure of interest rates Non-par floating rate loans Valuation Modelling expected floating rate loan cash flows Discounting floating rate loan cash flows to fair value Incorporating credit risk into loan valuation models Exercise: Floating rate loan synthesis – Loan pricing calculation, incorporating default risk – Loan margin calculation – Estimating floating rate loan cash flows from the forward curve – Calculating current fair market value by discounting using the zero curve Case study: The development of Asian debt markets since the Asian Financial Crisis 1. Financial structure, development and economic growth 2. Asian debt markets pre-1997 3. Critical events in Asian debt markets 4. Debt market reform: Response of policymakers since 1997 5. Post-crisis development of Asian debt markets Fixed rate loan and bond analysis How interest rates relate to bond yields Fixed rate loans as bond equivalents Characteristics of bonds Floating rate loan vs. Bond pricing methods Bond price vs. Yield Calculating a bond's price given a known Government benchmark yield and credit spread Calculating a bond's yield from a known price Exercise: Calculation of a bond’s price from the Government equivalent yield plus credit spread and comparing it to the pricing of a loan with the same maturity Fixed rate loan pricing from FTP internal funding rate Revaluation of fixed rate loans due to change in internal funding rate input parameters Day 3 Bond risk metrics and their application to fixed rate loan analysis Duration Convexity Risk dynamics for different loan structures Floating rate Fixed rate Bullet Amortising Principal at maturity and periodic interest payments Exercise: Calculation of fixed loan risk metrics for different loan structures Interest rate swaps Introduction: Fixed for floating - "plain vanilla" - swaps Pricing model inputs The zero curve The forward curve Valuation Fixed leg Floating leg Net value Inception During life of swap when rates change Pricing during a swap’s life Exercise: Pricing an interest rate swap during its life given different interest rate scenarios Asset and commodity-based lending structures Rationale Key types Corporate assets Non-current assets Property Plant Current assets Receivables Inventory Commodity Benefit to borrowers Key types Role in Shari’a-compliant lending Commodity based returns Principal protection Managing commodity risk Equity Key types Convertible Exchangeable Total return swap based on index Equity linked notes Structuring equity linked notes Zero coupon bond plus option Asset based loan pricing models Forward start loan products Pricing intrinsic value of forward start loan from the forward curve Forward Rate Agreements (FRAs) FRA pricing calculation Exercise: Pricing forward rate agreements Module 2: Advanced Loan Pricing and Structured Debt Products Day 1 Interest rate derivatives: Purpose, pricing and valuation Risk management Lender perspective Prepayment risk factors Interest rate Borrower credit rating improvement (credit migration) Availability of equity refinancing Credit risk Fixed rate loan duration risk Floating rate loan basis risk Borrower perspective Floating rate borrowers: Risk of rising rates Fixed rate borrowers: Opportunity cost of falling interest rates Foreign currency borrowers Accessing international capital markets FX rate risk Foreign currency interest rate risk Principal derivative types Interest rate swaps Fixed for floating Basis swaps, e.g. deposit rate basis into 3 month JIBOR Forward start swaps Cross Currency Swaps (CCS) Purpose Hedging Enabling clients to access cheaper borrowing Comparative borrowing advantage Types Fixed for fixed CCS Fixed for floating CCS Pricing Pricing at inception Valuation during a CCS's life Analysis of clients' financing and currency risk management requirements Asset cash flows, e.g. income from commodity assets in US$ Liability cash flows, e.g. interest payments in local currencies Exercises: Structuring cross currency swaps – Hedging – Enabling clients to access cheaper borrowing – Comparative borrowing advantage Optionality in loan structures Fundamental concepts Payoff profiles Prepayment clauses American-style European-style Default as an option Probability analysis of uncertain outcomes Central role of volatility Other key factors including Time to exercise date Strike rate Current rate Loans with embedded options Structure, e.g. Bermudan Borrower call option, e.g. full or part prepayment option Yield analysis Yield to call Yield to worst Exercise: Calculating yield to worst Valuation Value of non-callable loan less value of option Interest rate lattices Binomial trees Forward rates Interest rate volatility Risk analysis Impact of optionality Effective duration Lender put option (right to enforce early redemption of loan) Pricing optionality Key concepts Volatility Boundary conditions Time to exercise date Strike rate Current rate Pricing models for interest rate related options Forward rates Assumed probability distribution Summary: How enhanced loan features meet clients' needs Fulfilling financing requirements Minimising overall cost of financing Exercise: Pricing a fixed loan with a call option using a three period binomial option pricing model: – Non-callable loan – Call option – Callable loan Day 2 Swaptions Swaptions as an option to exercise swap agreement at a given point in the future Estimated cash flow profile Pricing: The Black (1976) model Exercise: Valuation of a swaption Caps, floors and collars Understanding the purpose of interest rate caps, floors and collars Benefit to client of interest rate caps Benefit to bank of interest rate floors Financing cost reduction effect for client of Collar vs. Cap Interest rate caps as a series of caplets Pricing caps, floors and collars Exercise: Valuation of an interest rate caplet Counterparty risk in derivative transactions: Credit Valuation Adjustment (CVA) Pricing data sourcing and derivation Deriving pricing factors from internal and external sources Bootstrapping: Deriving discount rates for loan pricing from market data Interpolation: Derivation of, e.g. 3 and 6 month rates from longer term rates Projection: Derivation of 18 month rates from annual rates Internal ratings approach Bond market yields and credit spreads Credit Default Swap (CDS) markets CDS premia interpretation Translating CDS premia into discount factors to price loans Deriving minimum loan pricing levels: Opportunity cost analysis Bond market yield curves CDS markets Exercise: Deriving discount rates from debt markets and using them to price a loan Loan portfolio analysis and management Understanding and managing loan portfolio risk Correlation risk Borrowers Collateral Effective diversification Residual risk factors Interest rate Collateral values, e.g. property Equity markets Commodity markets Exercise: Hedging loan portfolio duration risk using interest rate derivatives Structuring, pricing and risk management of Shari’a compliant loan products Review of Islamic banking principles and structures Overview of key Shari'a financial principles Usury: Riba Uncertainty of outcome: Gharar and Maysir Shared risk-taking: Mukhatarah Forbidden activities: Haraam Fundamental concepts in contemporary Islamic finance Sharing of risk between contracting parties Cost plus mark-up (Murabahah) Profit sharing (Mudharabah) Joint venture (Musharakah) Payment of religious tax (Zakat) Case studies: Translating Shari'a guidelines into loan products Deferred payment structures, e.g. Bai’ Bithaman Ajil (BBA), Bai’ al’ inah Collateral-based lending, e.g. Murabahah Leasing plus sale structure, e.g. Ijara wa Iqtina Trade financing, e.g. Istisna, Bai’ Salam Floating rate and repayment instalment structures, e.g. Musharakah Mutanaqisah (MMQ) Joint venture (risk sharing) structures, e.g. Musharakah Project financing Introduction Due diligence: Assessing the risk of projects Understanding the roles of the participants and identifying opportunities Financing and risk management Project financing pre-contract requirements and hedging Structured financing during project SPV lending structures Using tailored swaps to structure project financing lending transactions Swaptions Forward start swaps Amortising swaps Accreting swaps Risk management Documentation Collateral and security Project financing-based Islamic bond structures Sukuk investment into the assets of the project Meets with the requirements for risk-sharing and asset ownership rather than debt
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