Standard

TradeRisks designs and develops financial and credit scoring models for the analysis and management of liabilities of sovereign institutions to assist these clients in understanding their credit risk exposures to private sector corporates and institutions, both domestically and overseas.

We have assisted state treasuries with the credit modelling of financial institutions and corporates which have outstanding treasury guarantees, borrowings, and receivables due to the treasury. We have also advised ministries of finance on the management of fiscal risks and the monitoring of contingent liabilities associated with state lending and investment in infrastructure and Public-Private Partnerships ('PPP').

Our approach entails the risk modelling of both the idiosyncratic credit risk of individual state counterparties, and the econometric modelling of market factors impacting these credit exposures, such as exposure arising from foreign currency mismatches on counterparty balance sheets.

TradeRisks is actively involved in both the raising and/or refinancing of capital markets debt. This includes both straight corporate bonds, project finance bonds and, before the financial crisis, securitisations. Our team has significant capital markets experience and is able to offer clients advice and full transactional services including placement and execution.

Since the start of the financial crisis, banks stopped all underwriting of bonds and also effectively stopped making secondary markets (i.e. bid offer spreads of 25 basis points on 30-year bonds do not constitute a secondary market).

The lack of underwriting on the part of investment banks for primary bond issues combined with no liquidity in many parts of the secondary market has reduced their role to that of “matched brokers”. Matched brokers do not need capital, which means that more efficient providers have entered the market for this and other functions, which were formerly the preserve of investment banks. This provides borrowers with additional choice and competition and is a development which is congruent with moves by regulators to create new direct lending channels between end investors and borrowers.

As such, sophisticated borrowers are increasingly willing to interface directly with institutional investors in the same way that they have previously done with bank lenders, a trend that is also supported by the authorities and investor community.

<p>For individual funding requirements of £150m or more in the capital markets, TradeRisks advises and manages every stage of the process from the initial identification of funding requirements to the structuring of the documentation and obtaining a credit rating, preparation of road show materials and placement and settlement of bonds with investors through a process offering transparency for both borrowers and investors. We have acted as Bond Arranger on three major bond market transactions for Circle Anglia Treasury Limited, Sovereign Group and Notting Hill Housing Trust.</p>

<p>Borrowers benefit from our transaction management expertise which streamlines process, shortens timetables and reduces transaction costs. We have also led a number of structural innovations including a gilt purchase mechanism designed to reduce the cost of carry for borrowers without the typical associated accounting volatility.</p>

<p>The largest corporate borrowers with particularly sophisticated treasury departments may be equipped to deal with all of the rating, structuring and documentation aspects of a bond issue/tap issue. However, the final stage of price guidance, running the order-book, allocating and settling the issue requires additional specialist infrastructure which will not be cost effective for most treasury departments to put in place and maintain. In these circumstances, TradeRisks provides the market presence and necessary infrastructure to enable the efficient completion of the transaction at a cost commensurate with the role undertaken.</p>

TradeRisks also provides its clients with the full range of advice and services required when undertaking these issues below the £150m typical benchmark issue size. TradeRisks acts as arrangers for these issues, which we refer to as rated and listed notes, via OTC Exchange, the platform set up by TradeRisks to allow a direct interface between sophisticated borrowers and institutional investors. OTC Exchange provides investors with access to multiple individual credits but with standardised terms and documentation and a common brand. Importantly, and in contrast to structured group vehicles, this route offers full credit transparency allowing investors to reflect their risk return appetite for different credits. The ability to approach multiple investors represents a better option for borrowers than the traditional bi-lateral private placement route where, after a long documentation negotiation process, the borrower was frequently left with the option to accept the terms a single counterparty was willing to agree to or to pay both parties' legal costs and pull out. TradeRisks' deal management expertise, standardisation of documents and ability to place issues directly with investors has enabled the costs associated with deals of this size to be reduced significantly.

Although our preference is for borrowers to maintain options with multiple investors, where circumstances determine this to be the most appropriate route (for example on financings of a specialist nature), unlisted, bi-lateral private placements can be arranged with the active investors in this area.

TradeRisks assists non-frequent borrowers to refinance their debt, to obtain either better economic terms or more operational flexibility. We believe that bond exchanges or public tender offers are not always in the best interest of non-frequent borrowers if they are entitled to buy back their bonds within the rules of the relevant exchange and applicable laws and regulations.

Our tailored and rigorous approach has achieved significant savings for issuers when compared with the standard investment bank approach to bond refinancings.

TradeRisks also guides clients through the complexities in managing bank debt including developing innovative solutions where borrowers are constrained by covenants or other lending restrictions, allowing borrowers to retain value embedded in historic loans and meet business objectives.

Pricing a derivative correctly to see if the rate offered is reasonable when compared with the mid-market rate is possible, but is an extremely complicated and time consuming exercise with a large margin for error. Without access to specialist knowledge combined with sophisticated and up to date pricing models and real time market information, it is near impossible to judge the reasonableness of a quote which contains any 'non-vanilla' complexities.

TradeRisks has an unparalleled derivative pricing capability and a proven track record with its clients, which has saved them tens of millions of pounds in execution costs alone. Our many years in derivatives structuring and execution enables us to very quickly understand and model highly complex derivatives structures, and to determine the key value drivers of transactions for our clients.

TradeRisks advised on and executed (or unwound) around £3.5bn derivatives on behalf of its clients during the last 3 years. We have transacted swaps across the entire curve, i.e. 1-40 years. These have included Bermudan cancellable interest rate swaps, structured inflation swaps and other complex structured derivatives.

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, inflation, credit, and foreign exchange.

As an advisor in all aspects of the derivative trade lifecycle, TradeRisks is a leading derivatives trader, structurer and deal negotiator, and has detailed knowledge of post-trade settlement and back office processes.

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

Each transaction executed by TradeRisks shows the execution costs or the market value from mid-market of the transaction at the execution time. The execution cost is then translated into a spread over the mid rates. This is essential in order to measure treasury performance and evaluate the overall benefit of the transactions.

When measuring the execution cost of any financial transaction (or group of transactions), this is simply the market value of the new financial instrument, minus the market value of the replaced financial instrument, if any, adjusted for any cash amounts received or paid.

Financial transactions include loan facilities, bonds, and derivatives (whether embedded or standalone) and the market value is the standard net present value of projected future cashflows (using market implied rates and volatilities), with the discounting curve being, in the case of derivatives, the mid-market swap curve, and in the case of loans or bonds, the cost of new debt expressed as a margin over mid-market swaps.

For more information on Treasury Execution Benchmarking, please click here.

OTC Exchange is a market place created by TradeRisks for non-bank funding and hedging for corporates, which are natural fixed rate and inflation payers, seeking to transact directly with other corporates wanting to unwind hedges, institutional investors who are the natural fixed rate and inflation receivers, and banks with whom they have no lending "relationship", i.e. no product tie-ins or bundling of loans and hedging.

OTC Exchange is risk and return transparent and unbundles the underlying loan assets from the swaps.

Executing swaps through OTC Exchange reduces:

  • transaction execution costs when entering into and unwinding/reversing a swap

  • counterparty credit exposure, security utilisation and margin call risk

currently incurred by businesses when entering into long term swaps with their lending banks. In the absence of the pricing competition and reduced counterparty risks introduced by OTC Exchange, these costs and risks have often become so severe that businesses are effectively prevented from managing interest rate risk by their lending banks.

Purchasing listed and rated notes through OTC Exchange provides:

  • standard credit analysis facilitating credit comparisons between assets within the same sector

  • standardised documentation

  • very low transaction costs

OTC Exchange supports the HM Treasury/BoE initiatives to promote non-bank lending and hedging channels.

Further information on OTC Exchange can be viewed here.

We provide customised business plan models integrated with our simulation models. These models allow the client to test assumptions on a large number of scenarios. Such assumptions may be in the form of changes in the 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 optimum in the face of scenario uncertainty (captured within TradeRisks' scenario planning model), and vice versa.

TradeRisks is also a Brixx Certified Partner, providing comprehensive business planning services, including structuring, population and training for all plans, business plan reviews and validations, Monte-Carlo and stress testing risk analysis and the provision of on-going economic recommendations.

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 for risk management.

Where not-for-profit organisations are concerned, we believe that their objectives can be comprehensively summarised in the maximisation of their Enterprise Value including the dividends/distributions made in the form of subsidies and other externalities (such as reduced carbon emissions, etc.). We refer to these dividends/distributions as the Social Dividend and we refer to the Enterprise Value combines with the present value of projected Social Dividends as Social Enterprise Value.

With the same methodology, TradeRisks' models measure the return on public subsidy received. This measure highlights and gives value to the benefit derived by the public sector from investing into not-for-profit enterprises rather than providing subsidies directly to individuals. This measure has become critical in the current environment where governments are placing greater scrutiny on their investment and spending commitments.

We have developed our own proprietary treasury, debt and derivatives dealing and risk management systems, TradeRisks. The calculation engine and user interface for these systems are written in C++ and Java respectively. The systems are part of our own systems infrastructure which we use to provide advice and manage our clients' treasury portfolios. TradeRisks also provide middle office reports such as current and projected counterparty credit exposure and collateral utilisation, option exercise probabilities for structured swaps, cashflow projections, and performance measurement relative to customised benchmarks. Through TradeRisks our clients have secure access to to view, model, and run reports and scenario analyses on their debt and derivatives portfolios.

TradeRisks provides one of the most advanced risk management systems for corporate borrowers. It provides day-to-day treasury and cash management functionality together with long term portfolio management projections and analysis:

  • key user task management, highlighting LIBOR payments, cancellable swap dates and cancellation probabilities, availability period dates, etc;

  • analysis of the entire portfolio, sub-portfolios, individual debt and derivatives;

  • a central depository of all loan documentation including all embedded fixes and stand-alone swap confirmations;

  • duration and interest rate/credit and volatility sensitivity;

  • cashflow gaps at monthly or annual intervals;

  • unutilised facilities and drawn debt maturity gaps showing the currencies, fixed, floating and inflation linked profile through time;

  • option exercise probabilities;

  • derivatives credit exposure per counterparty;

  • derivatives security utilisation per counterparty;

  • expected margin calls per derivatives counterparty;

  • investment portfolio performance relative to a LIBID based benchmark; and

  • debt portfolio performance report relative to a customised fixed, floating and inflation linked benchmark, determined from the optimisation of the debt portfolio mix

Among the services we can provide are the following -

Advising on pricing and modelling derivative products: which models are appropriate; which 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: which 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.

Advising on the appropriate structuring of legal documentation: TradeRisks has many years of experience in the structuring of ISDA legal documentation and associated CSA collateralisation arrangements.

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.



Sid Saldanha