The importance of credit risk management has certainly ballooned over the past few years, with increasing competition for yield. With that in mind, the International Association of Credit Portfolio Managers (IACPM) is heading into 2007 with a new board of directors and an agenda that includes standard form contracts on credit default swaps (CDS), as well as discussion of the implications of converging credit desks, the use of insider information and the increasing amounts of leverage in the market.
The group began in 2001 as an industry association with the intention of increasing awareness and furthering the practice of risk management. Today, within the world of CDS, the organization is looking at issues such as how to hedge an undrawn revolver - how much to pay on its undrawn exposure - and cancelable versus noncancelable contracts.
The loan credit default swaps market currently has a lot more sellers than buyers, so the premium right now is relatively small, said Keith Ho, chairman of the IACPM, and managing director and head of portfolio management at Barclays Capital. This is primarily because of the significant global demand for credit assets, he said. With few fees in a bustling credit market, this protection vehicle is very attractive. And the IACPM has paid significant attention to its contracts, particularly the dissimilarities between the U.S., whose derivatives contracts are noncancelable, and Europe, whose derivatives contracts are cancelable if the underlying loans are called. The IACPM currently favors a standard form contract with the option to be either cancelable or not. Whether there will be that option will ultimately be determined by the market.
The convergence of loans, bonds and credit derivatives is another issue the IACPM will be closely monitoring. "These markets are converging because investors are looking across asset classes to extract the most value out of their investments," Ho said. Many banks are now merging groups into single leveraged finance teams with single points of origination but separate distribution platforms. In fact, in 2006 Barclays hired Joe McGrath and Rick Van Zijl to head up its new leveraged finance team, building the group from scratch. And investors are crossing these credit lines as well, looking to both first lien and second lien loans as well as high yield bonds for greater returns. This practice will be particularly interesting in the event of a downturn. "With increased tranching of corporates' capital structure, restructuring will become more challenging," Ho said.
Material nonpublic or insider information in both the public and, more significantly, the private market, which is not regulated, will also be on the table for the IACPM this year. The group will continue to discuss control measures that will regulate the misuse of this information in the market. "We are invested in the integrity of the markets," Ho said. "Without integrity, the market will suffer from diminished capacity."
Increasing leverage is of concern to the organization as well. "Multiples are high, there is no doubt about it," Ho said. The leverage is more concerning where it is utilized for companies who have not displayed an extended history of very stable cash flow characteristics, he said. And while cash is still flowing, with most economists predicting global growth in 2007, there are always idiosyncratic risks. But for now, it seems like the IACPM will have an ample amount of healthy credit to monitor in its global discussion forums for 2007. "The growing appeal of these investment products and increased diversity of the credit markets promotes liquidity in the market," Ho said. "Liquidity is our lifeblood."
The organization is also looking to expand, crossing into territories like Asia, which are becoming larger players in the credit markets. It began with nine founding members and has grown to include 74 members from 13 countries. The IACPM's steady growth can be attributed to the solid product that they offer their members - increased understanding, Ho said. "While we are competitors, we benefit from working together to better understand risk which makes the market safer as a whole," he said.
The group's new board of directors has expanded to 15 from 12, with Allan Yarish of Societe Generale serving as vice chair, Don Noe of JPMorgan serving as treasurer and Davide Crippa of Swiss Re taking on the role of secretary. The other board members are Victor Bulzacchelli, Bear Stearns; Stephen Dellosso, Bank of America; Masahiro Hosomi, Bank of Tokyo-Mitsubishi UFJ; Mark Hughes, Royal Bank of Canada; Tamar Joulia, ING; Sean Kavanagh, Deutsche Bank; Pierre Lepinoy, BNP Paribas; Neville Mallard, ANZ; Evan Picoult, Citigroup; Russell Playford, Wachovia; and Alexander Santos, ABN Amro.
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