# UGD for Initial Ratings

 Initial Rating 1- UGD AAA 69% AA 73% A 71% BBB 65% BB 52% B 48% CCC 48%

# Problem

Problem

ABC bank has extended a line of credit of US$120mn to XYZ company. The company has already drawn US$50mn of the line. The company is assumed to have a Usage Given Default of 40% and companies with similar ratings are known to have a default probability of 20%. The assets of the company are such that it will not be possible to recover more than 50% of the value. What is the Expected Loss?

Solution

OS =  $50mn COM =$120mn
Undrawn Portion            = $120mn -$50mn = $70mn UGD = 40% Adjusted Exposure (EA) =$50mn + 40% * ($70mn) =$50mn + $28mn =$78mn
Expected Loss (EL)         = EAD * PD * LGD
= $78mn * 0.2 * 0.5 =$7.8mn

Issues in Parameterising Credit Risk Models

• All the data for an obligor must be accurate and complete. A “Drill –up” approach is required
• UGD depends on the risk rating of the facility which is generally internal rating. The accuracy of such rating is questionable
• Not all firm are rated by NSRSO
• LGD is dependent on the seniority in claim and the collateral for the same
 Corporate Bonds Recovery Rates Lieberman Christos Senior Secured 53.80% 57.89% Senior Unsecured 51.13% 47.65% Subordinated 32.74% 31.34% Junior Subordinated 17.09% N.A

• Privately placed debt has fared better than publicly placed debts
• The EDF has been based on publicly traded firms so it is not entirely useful in its avatar for
• private firms