Optimisation of Debt Portfolio Mix

Our approach and techniques to determine the optimum fixed, floating, inflation-linked, maturity and/or currency mix of debt are based on proprietary business plan simulation models which we developed over many years of investment banking experience advising sovereign, public utilities, and multi-national corporate debt managers around the world. We use Monte Carlo simulations of projected revenues and long term debt cashflows for the debt portfolio combined with alternative debt or hedging strategies. The results are typically presented in the context of the client's strategic plan in terms of, say, the likelihood that financial measures, such as net income or interest cover, reach critical levels.

TradeRisks Monte Carlo simulation model samples historic prediction errors from a historical database of implied forwards prediction errors for nominal and real interest rates and inflation. Risk is generated around current implied forward projections from the fact that the historic market implied forwards have been bad predictors of future rates and inflation. To estimate long term expected costs the model analyses the extent to which forwards have been wrong or biased in some directions more than in others.

The determination of the optimum debt composition or development strategy using TradeRisks methodology has the primary objective of reducing long term cashflow volatility within the business plan, but expected cost is also taken into account as described above as a secondary consideration.

Bank Debt

TradeRisks assists its clients in the raising of traditional bank funding. The level of involvement can range from providing answers to ad hoc queries to running the whole process through the initial identification of funding requirements; the examination, evaluation, benchmarking, and negotiation of loan terms; and the execution and finalisation of the facility.

Capital Markets

TradeRisks is actively involved in both the raising of capital markets debt, and the buyback of issued bonds. This includes both straight corporate bonds and securitisations.

For the raising of capital markets debt TradeRisks advises and manages every stage of the process from the initial identification of funding requirements to the structuring the documentation and obtaining a credit rating to identifying the most appropriate investment banking sales force for its placement.

Some old secured bond debt can be inefficient in its security utilisation and the cost of maintaining credit enhancements such as debt service reserves.

TradeRisks has already identified and executed millions of pounds worth of savings for existing clients through detailed analytical reviews of an organisation’s debt portfolio including innovative approaches to the purchase of bonds on the open market.

Business Planning and Valuation Models

TradeRisks provides customised business plan models integrated with our simulation models and markets databases. These models allow the client to test assumptions on a large number of scenarios. Such assumptions may be in the form of changes in debt portfolio structure, operational cashflow projections, capital expenditure or funding projections going forward.

While conventional sensitivity analysis models determine the best response to each scenario, they fail to value the options that are available only before certain information, such as demand, is known. TradeRisks uses scenario planning models that take full account of embedded real options to expand or abandon projects. For example, a strategy that is suboptimal based on a conventional scenario analysis model may be optimal in the face of scenario uncertainty (captured within TradeRisks' scenario planning model), and conversely. 

The models measure the "Enterprise Value" under alternative scenarios, thus providing the means to evaluate the marginal contribution of new business strategies within a rigorous framework of risk management.

For not-for-profit enterprises, such as housing associations, the models measure the marginal contribution of each new business unit in terms of "total return" measures which take into account development standards, number of people housed, community development, etc.

Project Evaluation and Project Management

TradeRisks uses its sophisticated valuation techniques and methodologies to evaluate a variety of projects including mergers, acquisitions, and joint ventures. Using advanced analytical allows both meaningful valuations and comparable valuations to be performed.

TradeRisks also provides financial evaluation of development and investment opportunities including detailed sensitivity analysis, SWOT and PEST analysis, and structuring advice. In the case of competitive bid or tendering processes TradeRisks can incorporate this into any bid, highlighting the value added, depth of financial understanding, and overall credentials of the bidding organisation. TradeRisks can project manage the bid process and, upon completion, assist in the post-selection process and implementation stage.

Structuring

TradeRisks incorporates legal, tax, accounting, property, and finance experience to create the right structure for each project and investment vehicle.

Each structure, be it UK domestic or cross-border, is designed to client specifications with a focus on the commercial goals as well as tax and financing.

Structures used have included joint ventures, limited liability partnerships, vanilla corporates, CICs, REITs, and closed ended funds.

Investment management

TradeRisks provides investment management services at both a strategic level and a more micro-level.

At the strategic level, the TradeRisks team has considerable experience in working with central banks, fund managers and insurance companies on the theoretical and practical aspects of implementing benchmarks. Our benchmark analysis approach relies on the evaluation of risk-return trade-offs of alternative strategies relatively to the liability stream that funds them, where the risk is defined for multiple periods and captures the uncertainty in re-investment rates. Using these models, we are able to select investment strategies in a manner that takes into account the behaviour of market price and credit spread correlations in both stable and non-stable or extreme market conditions, i.e. combining event risk with statistical measures.

At the micro level, we specialise in the provision of fixed income discretionary portfolio management. We use HSBC as custodian and settlement agent. 

TradeRisks also provides a manager selection and monitoring service. TradeRisks are independent of all investment managers and work to ensure their clients have the most appropriate managers for their portfolio. TradeRisks will not just consider the performance record of the manager but will examine the suitability of that manager for the client, their ability to operate and add value in the prevailing market, and most importantly, the priorities and needs of the client in both the short and long term. TradeRisks will also negotiate the management fees ensuring all charges are fully understandable and transparent.

Risk Management and Treasury Advice

TradeRisks provides its clients access to its debt and derivatives management system. The system enables us to understand instantly the financial risk exposures of our clients and advise them accordingly. It enables both our clients and us to see their positions as we talk to them over the phone or when negotiating with their banking counterparties.

The TradeRisks system provides:

• mark-to-market of the entire portfolio, sub-portfolios, individual debt and derivatives, a (including the option value in the case of cancellable swaps);
• duration and interest rate/credit and volatility sensitivity (from the entire portfolio down to the individual instrument legs);
• cashflow gaps (at monthly or annual intervals);
• maturity gaps (showing the fixed, floating and inflation linked profile through time);
• option exercise probabilities (for cancellable swaps);
• cashflow-at-risk;
• value-at-risk;
• derivatives counterparty credit exposure (per derivatives counterparty);
• derivatives security utilisation (per derivatives counterparty);
• investment portfolio performance report relative to a LIBID based benchmark;
• debt portfolio performance report relative to a customised fixed, floating and inflation linked benchmark determined from the optimisation of the debt portfolio mix.

The system also provides a selection of reports designed to aid and facilitate an organisations treasury department through snapshot reports of current borrowings, duration, maturities, credit ratings, and debt profile by loan or counterparty.

TradeRisks offers a basic service where all analyses are based on end-of-day rates and bond prices and are carried out on TradeRisks servers every business day at midnight. This basic service is the minimum information that any treasury using derivatives (either stand alone or embedded) should have. Similarly, access to derivatives security utilisation reports should be a pre-requisite for the signing of any ISDA credit annex that requires cash or security collateralisation based on changes in the mark-to-market of the portfolio.

TradeRisks can also provide live market value, sensitivity, and performance analyses, and perform "what if" analyses of the impact of potential transactions. This capability has already saved our clients significant amounts through lower transaction costs and enabled them to have a market professional type relationship with their bank derivatives counterparties.

Derivatives Consulting and Modelling

TradeRisks provides advice and technical tools for derivatives pricing, trading, risk management and modelling. Our team has many years of experience of derivatives pricing and risk management in the fields of interest rates, credit, foreign exchange, and equity and commodity derivatives.

TradeRisks provides combined credit and interest rate risk management model design, implementation and back testing for financial institutions.

On the credit side, TradeRisks most recent work has been on the design and development of models that combine portfolios of loans to corporates for whom (equity or debt) securities are either not publicly quoted or are illiquid with portfolios of exposures to swap counterparties with liquid underlying securities.

Among the services we can provide are the following -

• Advising on pricing and modelling derivative products: what models are appropriate; what parameters should be used; comparing outputs of in-house or vendor systems with those given by our own models.
• Advising on risk management of derivatives: what risks should be hedged; how to cope with risks that cannot be hedged; how different model risks should be combined; how limits can be set.
• Reviewing existing systems and procedures for trading, pricing, modelling and risk management.
• Forensic analysis of what went wrong after unexpected underperformance, significant losses, rogue trader events etc.
• Education, training and information dissemination by written or verbal means.