New System for Credit Rating of Hybrid Securities

Projektinformationen

CoCoBondsValuation

ID Finanzhilfevereinbarung: 684749

DOI

10.3030/684749

Projekt abgeschlossen

EK-Unterschriftsdatum 18 Juni 2015

Startdatum 1 Juli 2015

Enddatum 31 Dezember 2015

Finanziert unter

• INDUSTRIAL LEADERSHIP - Leadership in enabling and industrial technologies - Information and Communication Technologies (ICT)

Gesamtkosten

€ 71 429,00

EU-Beitrag

€ 50 000,00

Koordiniert durch

THEMARKETSTRUST-ADVISORY
Luxembourg

Periodic Reporting for period 1 - CoCoBondsValuation (New System for Credit Rating of Hybrid Securities)

Berichtszeitraum: 2015-07-01 bis 2015-12-31

Zusammenfassung vom Kontext und den Gesamtzielen des Projekts

The Market Opportunity

Credit Rating Industry

For over 80 years, Credit Rating Agencies (CRAs) have been an important part of the financial markets infrastructure. During the subprime mortgage crisis in 2007, the big 3 CRAs lost the market’s trust, as they were far too late in their reactions and noticeably inaccurate in their risk assessments. Nonetheless, they have still been able to retain their oligopoly and currently hold +95% on the EUR 5 Billion market.
The lack of competition in this industry leads to a highly profitable CRA business with EBIDTA margins north of 40%, at the expense of the issuers of securities who pay elevated prices for the rating services.

Meanwhile, motivated by regulatory demands and the prolonged period of low interest rates, the investment paradigm is changing towards riskier and higher-yielding products. Major issuers like banks, insurance companies and large corporations are increasingly moving into more complex, hybrid and structured securities.
Among them are the Contingent Convertible Bonds, known as CoCo Bonds. EU regulators strongly support this type of hybrid security as a tool to prevent future bailouts of banks with taxpayers’ money. The number and diversity of CoCo Bonds issued by banks is rapidly increasing and their value is expected to exceed EUR 200 Billion by 2019.

On the other side, Investors are still perceiving those hybrid instruments like a black box and are expressing the needs for for transparency in theirs associate risks. In that context, TheMarketsTrust has conducted a feasibility study to assess if there is a real business opportunity as well as in which form the new rating and valuation service should be distributed.

Arbeit, die ab Beginn des Projekts bis zum Ende des durch den Bericht erfassten Berichtszeitraums geleistet wurde, und die wichtigsten bis dahin erzielten Ergebnisse

Work executed during this iteration aimed to define the following:
I) definition of the minimum viable product (MVS);
II) a detail product development roadmap;
III) a detail business plan;
IV) a market assessment based on interviews;
V) the identification of at least 2 potential customers for a "proof-of-concept".

Key results

I) MVS

Market Coverage

1) Current MVS should support the monitoring of all existing contingent convertible (CoCo) bonds. Actual size is 400 CoCo;
2) CoCo's have been issued by 150 Banks. Thus, the risk measurement of those institutions are required. Close monitoring of banking Tier 1 and Tier 2 capital are important.

Product Features

1) Data-driven credit ratings;
2) Reliable valuation, in real-time;
3) All relevant risk factor sensitivities;
4) Risk-adjusted comparison of two securities;
5) Compare security to a country or rating benchmarks.
6)Delivery via a web interface, real time push notification like e-mail, twitter, restfull API.

II) Product RoadMap
A detailed product roadmap report has been produced. Document describes the following:
1) The operational and data flow models.
2) A system Architecture design based on Leopard Workstation .
3) A 3 year high level plan with the different work packages.

III) Business plan. This document defines our strategy as well as its execution.

IV) Market assessment.
The majority of interviewees reported significant challenges with hybrid securities, especially with the CoCOs. In addition, all established credit rating agencies were evaluated negatively. All the financial community is waiting for an alternative Credit rating agency focusing on hybrid securities.

V) A list of potential customers is established.

Fortschritte, die über den aktuellen Stand der Technik hinausgehen und voraussichtliche potenzielle Auswirkungen (einschließlich der bis dato erzielten sozioökonomischen Auswirkungen und weiter gefassten gesellschaftlichen Auswirkungen des Projekts)

TheMarketTrust (TMT) will continue the project and will apply for the SME phase II project. Furthermore, feedback from the financial community is very positive. Thus, we are looking for more investors.
With regard to the social impact, our plan is to create the following jobs:
1) 24 jobs in year 1;
2) 30 jobs in year 2;
3) 33 jobs in year 3;

This excludes jobs created at the subcontractors level.

It is important to note that current project covers only the hybrid securities. Break even point will be reached at the end of year 2. Furthermore starting in year 3, we will expand and fully compete against the establish rating industry.

European Dimension and Economic Impact

The ability of the European banks to raise funding themselves is of critical importance for the European real economy. In that respect, our project would contribute significantly to the transparency of the asset class of Hybrid Securities which is an increasingly important source of funds for banks. This would enable European banks to strengthen their capital, and thus trigger a ripple-down effect on the entire European economy.

Economic Benefit for the Clients

The large majority of financial investors perceive Hybrid Securites as non-transparent and difficult to risk-manage. Key advantages for the clients from our solutions are:

-- Transparency on the risk of an increasingly important part of their investment portfolios.
-- Easier regulatory and investment policy compliance.
-- Enable Accurate valuation delivered in real-or near-time enables data-driven decision making.

The most important -***- Reduce the reliance on US credit rating agencies

Leopard WorkStation is the main platform for our raiting

EPapadopoulos&WimSchoutens during london Conference of CoCo's