Leveraged finance is a rapidly growing asset class in Europe and is attracting an increasing number of sophisticated investors. However, there is a need for better risk and performance metrics in this asset class in order to improve transparency and liquidity. The new data pooling consortium, managed by Standard & Poor's Risk Solutions, will provide participating banks with information on a much wider set of data than they would otherwise have and enable them to benchmark their internal default and recovery ratings for capital efficiency and for Basel II purposes.
The European leveraged finance consortium builds on the success of Standard &
Poor's Risk Solutions' global project finance default and recovery consortium, in which four of the five above-mentioned banks are also active and for which the total number of bank participants is now 30. The lower-than-expected credit losses from project finance loans, as evidenced by the empirical data collected, were presented to the Basel Modeling task force and were instrumental in achieving a reduction in the associated risk weights for this asset class. As with the project finance consortium, Standard & Poor's Risk Solutions expects that many more banks and institutional investors will seek to join the leveraged finance consortium now that the service has been launched successfully.
The primary objective of the consortium is to quantify the historical risk performance of leveraged finance loans over the last five years on an absolute basis and relative to other asset classes such as corporate loans. The output of this initiative will facilitate more refined risk and profitability analysis, aiding pricing and capital allocation as well as discussions with regulators. Participating banks will receive a report on the loss experience of their bank and that of the overall pool, with appropriate sector, capital structure and geographical breakdown. The pooling of data will also allow the identification of the drivers of recovery, together with the historical loss distributions.
With regard to benchmarking the performance of leveraged loans, Standard &
Poor's has recently launched a European Leveraged Loan Index, the first independent (non-bank) index covering this sector.
