Moody's Corporation · NYSE:MCO
Moody's — Technical Presentation (July 2020)
23 slides from Moody's's technical presentation, July 2020
Slide 1: Credit Assessment, Loss Forecasting, and Pandemic Pathways
Credit Assessment, Loss Forecasting, and Pandemic Pathways Amnon Levy, Portfolio and Balance Sheet Research July, 2020 Burcu Guner, Risk and Finance SME Team
Slide 2: Global Challenge
Global Challenge How does one navigate a credit portfolio through so much uncertainty? » Which economies will be stabilizing? » When will delayed effects to the economy start demonstrating? » Will governments have funds to bolster economy through a second wave? » Lock down eases, the pandemic accele
Slide 3: Challenge: How Do You Manage Risk in a Rapidly Changing World?
Challenge: How Do You Manage Risk in a Rapidly Changing World? COVID-19 Fluid With Many Unknowns MEASURING & DRIVERS ECONOMIC IMPACT MANAGING RISK » Epidemiological – progression of » Depends on extent, timing, and » Measurement requires timely the epidemic interaction of drivers assessment of curre
Slide 4: Empirical Patterns: How has COVID-19 impacted industries so far?
Empirical Patterns How has COVID-19 impacted industries so far? Examples of Industries Most Impacted by Examples of Industries with Mild Impact to COVID-19 COVID-19 United Kingdom Air Transportation South Africa Pharmaceuticals 3.5% 2.0% 3.0% Median Default Probability* 2.5% 1.5% Median Default Prob
Slide 5: Understanding the Challenges
Understanding the Challenges Traditional credit measures don’t lend themselves to COVID 19 Traditional Internal Ratings » Rely on fundamental name-level analysis » Cannot be updated as frequent as virus evolution » How do you incorporate past events into your forward Who needs help? looking view » C
Slide 6: Timely and Dynamic Analytics and Data
Timely and Dynamic Analytics and Data Requirements for navigating this uncertain environment 1 Granular current state assessment of credit 2 Assessment of trajectories that consider: – Epidemiological paths – severity, length of economic shutdown accounting for government reaction (e.g., draconian s
Slide 7: Economic Impact Defined by Broad Brush Scenarios
Economic Impact Defined by Broad Brush Scenarios Require Industry Overlay Model Baseline GDP GROWTH CROSS-SECTIONAL COVID-19 OVERLAY MODEL 5% 0% -5% -10% -15% -20% Range across industries Euro Zone Netherlands South Africa Germany Source: Moody’s Analytics June S3 Economic Scenarios Economic scenari
Slide 8: New Analytics and Data to Navigate COVID-19
New Analytics and Data to Navigate COVID-19 Naïve models calibrated to historic dynamics will be misleading Increase in Expected Loss Under COVID-19 Scenario* x OIL REFINING COVID-19 stress test with Industry Overlay Model x COVID-19 stress test with no Industry Overlay Model RESTAURANTS Preserving
Slide 9: Incorporating Epidemiological Dynamics
Incorporating Epidemiological Dynamics Similarities across segments after controlling for variation in epidemiology EDF CREDIT MEASURE WINDOWS FOR DIFFERENT COUNTRIES (Global Sample of ~ 46,000 Firms) BASED ON DAILY COVID-19 CASES 6000 Canada Input China 7-day Moving Average of 5000 Germany Daily #
Slide 10: Significant Fiscal and Monetary Response
Significant Fiscal and Monetary Response With economic policy uncertainty hitting record highs South Africa FISCAL Since the outbreak of COVID-19, the government has been assisting workers and companies facing distress by providing wage support through the Unemployment Insurance Fund (UIF), temporar
Slide 11: Program Effectiveness
Program Effectiveness Historically, fiscal and monetary programs range in timing and the mechanisms that support targeted segments. - South Africa response to mitigate the Great The Banking Sector 2007-2011 2.0% Recession effects comprised different policies such as increasing public sector investme
Slide 12: COVID-19 Analytics and Data
COVID-19 Analytics and Data WHAT’S HAPPENED SO FAR Elevated : - default probabilities - expected loss Shocks to the markets Varying performance of NAME-LEVEL PROJECTIONS and the economy segments, industries & names HOTELS & RESTAURANTS PHARMACEUTICALS WHAT MIGHT HAPPEN NEXT? Varying industry impact
Slide 13: 2020 Expected Defaults Select Industries
2020 Expected Defaults Select Industries: December 31st Launch-Off Impact of Cross-Sectional COVID-19 Overlay Average One-year Default Probabilities (Dec 2019 to Dec 2020) Netherlands IG Moody’s EDF Implied Rating South African IG Moody’s EDF Implied Rating US Moody's Rated IG Industry EDF Baseline
Slide 14: C-S COVID-19 Overlay: Current and S4 96% Downside Projected PDs
C-S COVID-19 Overlay: Current and S4 96% Downside Projected PDs South Africa, EDF Implied Moody’s IG Rated, Dec 31st, 2019 Launch-Off Traditional Model Banks current Traditional Model with C-S COVID-19 Overlay 1.60% estimated 1-year PDs 1.60% revised from 50bps to Current Assessment 1.40% 40bps. 1.4
Slide 15: C-S COVID-19 Overlay: Current and S4 96% Downside Projected PDs
C-S COVID-19 Overlay: Current and S4 96% Downside Projected PDs US Moody’s IG Rated Dec 31st, 2019 Launch-Off Traditional Model Traditional Model with C-S COVID-19 Overlay 12.00% 12.00% Banks current Current Assessment Current Assessment 10.00% estimated 1-year PDs 10.00% revised from 3% to 1%. 8.00
Slide 16: Current and S4 96% Downside Projected Rating Composition
Current and S4 96% Downside Projected Rating Composition South Africa EDF Implied IG Rated Select Industries Dec 31st, 2019 Launch- Off Q1 2021 S4 Projected Consumer Durables Current Assessment experience a 60% 100% 90% downward migration. 80% Restaurants will 70% experience ~10% 60% 50% migration i
Slide 17: Current and S4 96% Downside Projected Rating Composition
Current and S4 96% Downside Projected Rating Composition US IG Moody’s rated Select Industries Dec 31st, 2019 Launch-Off Automotive and Air Transport experience Current Assessment Q1 2021 S4 Projected material deterioration with 100% majority falling below IG and 90% entering default. 80% 70% Utilit
Slide 18: US Automotive Current Assessments and Projections
US Automotive Current Assessments and Projections IG Moody’s Rated - Dec. 31, 2019 Launch-off 12% Current Assessment AUTOMOTIVE 10% (Baseline without CS Overlay) NOTES 8% • C-S COVID Overlay: as of June 20, Annualized 2020 Cumulative 6% AUTOMOTIVE • U.S. Baseline: real GDP is Default (S4 without pro
Slide 19: Performance - December 2019 to June 2020
Performance - December 2019 to June 2020 Credit Migration and Cross-Sectional COVID-19 Overlay 45.00% One-Notch Or-More Downgrade for Select Industries Accuracy Ratio 40.00% Number of 35.00% Method downgrade notch IG Firms HY Firms 30.00% Cross-Sectional 1 0.409 0.384 25.00% COVID -19 Overlay 2 0.34
Slide 20: Beyond COVID-19: Preparing for the Unknown Unknowns
Beyond COVID-19 Preparing for the “Unknown Unknowns” » Navigating the uncertainty of COVID-19 is causing a re-evaluation of common risk factors ❖ global, systemic and physical risks are the new normal » In the Covid-19 aftermath, some economies focus on ramping up R& D towards climate resilience and
Slide 21: Key Take-aways
Key Take-aways Managing credit portfolios in the current environment is a challenge we’ve never experienced. Requires a unique data set and analytics updated frequently Across a range of economic paths, inclusive of fiscal stimulus actions With multiple applications to help manage risk
Slide 22: moodys.com
Amnon Levy Burcu Guner [email protected] [email protected] +1 (415) 874 6279 +44 7792 697689 moodys.com
Slide 23: Navigating a Credit Portfolio Through COVID-19, July 2020
© 2020 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liabilit