信用風險限額

1Outline?Overview?Market

Concerns?Credit

Risk

Limits?Credit

Risk

Models?Credit

Risk

Diversification?Credit

Risk

Management

Process1Overview:Current

State

of

the

CreditMa?rAkltehtough

Fixed

Income

has

recently

outperformed

equity,

theCorporate

Bond

market

has

severely

underperformedTreasuriesThe

market

has

experienced

rising

defaults,

downgrades,

and

anunprecedentednumberofInvestmentGradecreditsfallingintoHighYield(a.k.a.“FallenAngels”)– “FallenAngels”areoverwhelmingtheHighYieldmarketastheynumber14ofthetop25issuersandcomprise20%ofthetotalamountoutstandinginHighYieldTelecom/Energy

have

been

at

the

core

of

the

fundamentaldeterioration

in

credit

with

outsized

spending

to

meetunrealistic

demand

expectations

and

aggressive

expansions

intoenergy

trading

in

utilitiesExtreme

market

volatility

and

limited

liquidity

bestcharacterizes

the

current

state

of

the

corporate

bondmarket–

Banks

are

restricting

access

to

liquidity

and

the

resulting

illiquidityis

contributing

to

the

credit

market’s

volatilityPortfolio

diversification

is

difficult

to

achieve

given

that

33of

amount

outstanding

and

42%

of

new

issue

volume

are

in

the1Market

Concerns?What

is

contributing

to

the

currentcredit

volatility?Bear

equity

market

andcorporate

scandalsCredit

recession

(stressedcredit

market)Liquidity

crisisHistorically

low

ratesEconomic

recovery

unclear1A

Bear

Market

in

Equity?Volatility

at

historic

highs

since

19973+

years

upside

of

technology

bubble2.5

years

of

bubble

bursting

and

corporatescandalsVolatility

measure

of

“%

days

per

year

S&P500

Index

moved

greater

than

+/-

1%”

in

August2002

was

43%

versus

22%

historic

average

since1925?Current

downturn

deepest

since

1973-74

andlongest

since

1929-32

or

1946-49–

At

its

July

2002

low,

the

S&P

500

was

48%below

its

March

2000

peak

and

the

decline

hasendured

for

29

months.

This

makes

it

thelongest

bear

market

since

1946/49

and

together(1)

The

BawnkiCtrehdit

Atnahlyest,1Au9gu7st320/0274

cycle,

the

steepest

of

thepost-WWII

period.(1)A

Bear

Market

in

Equity1?Valuations

are

still

above

historicnorms

on

almost

every

measure(Price/Earnings,

DividendYield,

Price/BPrice/Sales),

except

forEarningsYield/BondYield

(which

is

nearfair

value,

as

bond

yields

are

athistoric

lows)?Earnings

remain

under

pressure?Outflows

from

domestic

equity

mutualfunds

and

foreign

sales

of

US

stockshas

intensified

since

June

2002(2)(2)

Ned

Davis

Research

Inc.,

September

2002Recent

Equity

and

Fixed

Income

Returns(For

Periods

Ended

10/31/2002)Source:

Lehman,

Standard

&

Poors11Credit

Market

UnderS?Utnrprreecsedsented

numbers

of

distressed

credits(“Fallen

Angels”

are

investment

grade

credits

that

have

been

downgrato

high

yield)$115

billion

Fallen

Angels

YTD

through

October

2002Since

2001

default

rates

have

exceeded

1991

highs–

"Default

rates

have

been

rising

continuously

since

1999.hasbeenlikeacreditrecessionforseveralyearsandIexpeittocontinueuntildefaultratesclearlyhavepeaked.”EdwAltman,Ph.D.NYUSternSchoolofBusiness–

2001

experienced

the

most

ever

Chapter

11

filings

with

17and

pre-petition

liabilities

of

$230

billion?First

half

of

2002

had

74

filings

totaling

$130

billionSince

June

1997

a

series

of

financial

crises

have

resultin

huge

volatility

in

and

widening

of

credit

spreads;

thhas

produced

sustained

negative

excess

returns

incorporate

issuesMoody’s

downgrade/upgrade

ratio

rose

from

1.4

in

1998

t4.1Moody’s

year-to-year

defaults

rose

from

1.3%

in

1998

tSource:

Lehman,

Moody’s,

Edward

Altman1Liquidity

Crisis?Credit

contraction

in

bank

lending

andcommercial

paper

is

causing

a

“l(fā)iquiditycrisis”,

reversing

trend for

last

5

years

of20%

annual

expansion–

Bank

lending

is

currently

15%

lower

thanlast

July–

Non-financial

CP

has

contracted

47.7%

toa

low

of

$179.5

billion

in

June

2002

from

higof

$343.3

billion

in

December

2000?Financial

leverage

(ratio

of

current

debt

tototal

market

capitalization)

of

corporationsSource:iLenhmacn

reased

in

2002

to

26.6%

(on

$4.5

trillion),the

highest

level

since

the

1990-91

recession1Historical

Lows

ForInterest

RatesAggressive

Fed

easing

with

Fed Funds

at

1.25%

sinceNovember

6,

2002

cut

of

50

bpsThe

resulting

yield

curve

is

the

steepest

sincFall

1992Rates

at

4-decade

lows10-year

Treasury

Note

yield

of

3.57%

on

Octobe9th

was

at

a

44-year

lowAs

of

November

11,

2002

the

10-year

has

risen58

bps

from

this

lowHistorically

low

rates

led

to

another

mortgagerefinancing

wave

which

is

supporting

consumer

spendinExpectation

is

for

interest

rates

to

stay

low

thisyear,

rising

next

year

as

the

yield

curve

to

flattenfrom

the

short

endSource:

BloombergUPDATEUncertainty

ofEconomic

Recovery1?Blue

Chip

consensus

GDP

growth

is

forecast

at1.6%

in

Q4-2002

and

3.3%

in

2003.?Concerns

that

declines

in

equity

markets

andfinancial

wealth

could

reduce

consumer

spendingand

economic

growth?Continued

concern:

Geopolitical

risk

may

disruprecoverySource:

Blue

Chip

Consensus

ForecastInvestment

Grade

CorporateCumulative

Excess

ReturnsPeriod

of

NarrowingCorporate

Spreads1A

Series

ofFinancial

CrisesWorldcomEnronAsiaCrisisRussiaCollapse,LTCMTechnology

Bubble

CollapsesSource:

LehmanCorporate

Bond

ValuationsAnything

But

Telecom

and

Pipelines!(From

December

31,

2001

through

September

30,

2002)1Avoiding

Credit

Disastersand

Defaults

is

EssentialSource:

Lehman

(2002

YTD

through

October

31,

2002)1Telecommunications,NiagaraTCI

Comm,

ITTMohawkUS

WestCapital,Columbia/HCAWasteRite

AidXerox,Conseco,Management,FinovaKMartThefirst

ten

months

of

2002saw

the

largest

number

of

Fallen

Angels

(Investgrade

credits

that

have

been

downgraded

to

High

Yield)

in

history

(245

tota$115.4

Billion).Enron,

Calpine,JCPenney,

PG&E,Lucent,

Mirant,S.Cal

Edison,Delta

AirlinesW,orldcom,Qwest,

Tyco,Williams

Co.,GeorgiaPacific,USWest

Comm.,AT&T

Canada,Dynegy,Nortel,

Gap,Goodyear1WorldCom’s

$22.8

Billitotal

public

debt

ranksas

largest

fallen

angelQwest’s

$14.4

Billion

isecondTyco’s

$8.4

Billion

isthirdWilliams’

$8.0

BillionfourthEnron’s

$6.8

Billion

issixthGeorgia-Pacific’s

$5.7Billion

is

in

the

top

10May

2002

will

be

recallefor

a

record

$42.8Billion

of

fallen

angeldebt

moving

into

highyieldJuly

2002

was

nextlargest

at

$22.8

BillioCumulative

$115

Billionprincipal

of

fallenSource:

Lehman

(2002

YTD

through October

31,

2002)* Index

Exposure

--

Actual

balance

sheet

exposure

may

be

higher.Top

50

Fallen

Angels

from

1995-2002

YTDCredit

Risk

Management

is

Critical

to

Performa*nceHigh

Yield

Corporates:

Index

Returns

andDefault

Rates(From

1980

through

September

30,

2002)Most

years

of

peak

default

rates

or

following

year

are

also

years

of

high

returns:

1982,Source:

Lehman

High

Yield

Index

1983-2002,

*

-7.63%

Return

is

YTD

through

September

30,

2002,

CreditSuisse

First

Boston

(CSFB)

Returns

for

1980-1982,

Moody’s

Default

Rates

1983-2002,

*9.2%

Default

Rateis

for

annual

period

from

October

2001-

September

20021High

Yield

Spreads

By

Credit

Quality(From

January

31,

1990

Through

September

30,

2002)Source:

Credit

Suisse

First

Boston

(CSFB)1Paradigm

Shift

inFallen

Angels1?Over

20%

of

the

Lehman

High

Yield

Indexis

now

comprised

of

former

investmentgrade

credits.?Returns

fell

more

rapidly

than

ever

in2001-2002,

so

the

punishment

for

owninga

distressed

credit

was

severe.?Good

credit

defense

and

index-likeperformance

made

for

great

performanceLosses

in

Investment

Grade

BondsOccur

in

Months

Prior

to

DowngradesLoss

of

value

due

to

a

downgradeoccurs

over

a

few

prior

months.Depending

on

the

initial

credit

qualitylosses

could

stretch

over

2

months

forAAA-AA

and

up

to

8

months

forBAAThe

variability

of

the

magnitude

of

theloss

(i.e.,

Standard

deviation)

is

verysignificantAverage

Monthly

Underperformance

Due

to

Downgrade8/88

–

12/01Source:

Lehman11“Vintage

Year”#

distressedissues24-monthexcessreturnvs.UST16.56%-24.21%19905028.28%1991...1998142940.94%19.33%19991010.69%2000139Years

prior20012508.35%200154YTD

Jun

2002-68Years

since

2001122-23.71%AllYears3723.35%SubsequentExcessReturns(vs.UST)ofinvestment-gradebondsafterdistress**Since

2001

Long

Term

Relative*Performance

Subsequent

to

Distress

wasNegative

for

Investment

Grade

BondsConsistently

positiveexcess

returnssubsequent

todistress

before

2001resulting

from

aliquidity

crisisSource:

LehmanSince

2001

longhorizon2e3x.c08e%ss

returns

for

distressedbonds

have

beennegative

because

ofthe

credit

recession

*

Relative

to

Treasuries**

Lehman

defines

a

distressed

investment-grade

bond

as…Rated

Baa3

or

higher;

Fixed

coupon;

OAS

to

US

Treasuries

of

400bp

ormore;

and

Dollar

price

<80%

of

par.Absolute

vs.

RelativeRisk:

A

Debate1?A

desire

to

limit

absolute

risk

has

led

toincreased

tracking

error

for

credit

defensiveplayers

that

have

limited

issuer

exposures.?Index

issuer

considerations–

Should

indices

represent

the

active

investable

universe

othe

few

active

issues

available?–

Or

should

index

providers

keep

large

numbers

of

illiquidissues?–

Should

indices

caps

the

max

percentage

for

an

individualissuer??Should

limits

be

placed

on

the

amountoutstanding

for

currently

dominant

credits?–

Fallen

Angels

comprise

over

20%

of

Lehman

High

Yield

IndeRisk

Limits1?Divide

investment

grade

corporates

into

groupsby

quality

(AAA,

AA,

A,

BBB),

by

sectors

(oreven

subsectors),

and

by

duration

(0–2,

3-5,

6–10,

10+)?High

yield:

diversify,

diversify,

diversify?Classic:

Establish

limits

by

groups

and

byspecific

issuers

overall?Contemporary:

Use

a

combination

of

trackingerror

and

absolute

limits1Quantitative

CreditRisk

MetricsSpreadOASOAS

volatilitySpread

durationSwap

spread

durationReturnExcess

returnVariance/Covariance

ofSpreads

or

ExcessReturnsIntegrates

well

withMarket

RiskSpreads

can

be

difficultDefaultCDSCDS

volatilityDefault

ProbabilityLoss

FrequencyLoss

Given

DefaultTransition

ProbabilityMatrixVariance/Covariance

ofSpreadsCredit

VaRDifficult

to

estimateduring

periods

of

sparseQuantititative

CreditMeasures1?Moody’s

KMV

EDFs?Moody’s

RiskCalc

PDs?CreditSights’

BondScore

CREs?CSFB

CreditRisk+?McKinsey

CrPortView?RiskMetrics

CreditMetrics/CreditGrad?Standard

&

Poor’sModel

Comparison1Model

Comparison1QuantititativeDiversification

Products1Default

related?Moody’s

KMV?CreditGrades?Gifford

Fong

AssociatesSpread/Return

based?Lehman

POINT?Barra

TotalRiskCredit

Risk

Diversification

bySector

and

Rating1Credit

diversification

across

sectors

can

reduceportfolio

volatility

from

concentration

risk

for

crethat

have

a

higher

probability

of

becoming

distresseor

can

experience

higher

volatility

-

thus

reducingstandard

deviation

of

returnsSystematic

vs.

Idiosyncratic

RiskContagion

risk

has

hammered

certain

sectors

wherethere

have

been

considerable

bankruptcy

filings

and“fallen

angels”;

these

sectors

are

slowly

becomingmore

attractiveHistorically

fixed

income

has

a

low

probability

of

lprincipalCredit

differences

result

in

diversification

benefitFinancialIndustrial1Credit

DiversificationDowngrade

Risk

vs.Other

Non-Systematic

RiskDowngrade

only

idiosyncratic

size

ratio

for

different

ratings:

AaAaa:A:Baa

=

9:4:1–

Downgrade

diversify

requires

9

times

more

low

grade

Baa

thigh

grade

AaaIdiosyncratic

risk

as

stable-rated

bonds

experience

“natural”spread

volatilityTotal

idiosyncratic

risk

less

differentiated

by

quality

thandowngrade

risk

aloneSource:aLeshmain,nLedviDycnkaintAeugd14,b2y0y02,sPiRiMzIAeNewrFraonttiiieors

ifnfCorerditdRiiskf)ferent

quality

ratings:

Aa-Diversificat