Overview

Risk Integrated’s Specialized Finance System is running live at three banks
on over $100 Bn in assets across 20 countries.

The Risk Integrated Specialized Finance System (SFS) is the most complete solution available for pricing and structuring deals in complex asset classes including project finance, leveraged finance, and commercial real estate. The SFS combines state-of-the-art methodology, technology and workflow management, providing full Basel II compliance at the advanced level.

The SFS allows financial institutions to:
	Collect and consolidate detailed commercial real estate information on each loan in the portfolio
	Quickly perform portfolio analysis including stress testing and economic capital.
	Generate highly detailed reports for regulators and senior management.
	Grade loans
	Analyze and structure risk in individual deals
	Comply with Advanced Basel capital requirements
In the commercial real estate space, the SFS covers all asset types including investment properties, housing construction, commercial construction, CMBS, equity investments, CDOs and property derivatives.  For project finance, the SFS covers power generation, PFI, infrastructure and oil, gas and mining. The SFS combines the most sophisticated analytics available with a pragmatic technology implementation.  The sophistication includes the ability to structure deals with mixtures of senior, junior and mezzanine debt with multiple covenants in any currency.  Deals can be structured with any amortization pattern, interest rate hedges, FX hedges and property derivatives. The SFS is a complete and flexible platform designed for seamless integration with financial institutions’ own business processes and systems. We work directly with the lending officers, risk managers, and IT managers to train them on the system, and to customize the system to their requirements.

Methodology

Traditional approaches for measuring risk, such as regression and static cashflow models are inadequate for assessing the highly complex assets in specialized lending. Risk Integrated has developed a simulation methodology which allows the use of all available information on each asset, including the deal structure, historical market volatility, forecasts, counterparty credit quality and historical default data if available.

The proprietary methodology we have developed gives financial institutions an accurate, integrated view of the sources of their risk and how to manage it. This reveals whether the risks they take are aligned with the rewards they receive from those risks.

Using macro-economic simulation and cashflow structures, the SFS fully correlates economic effects. It rates individual credits, manages the full portfolio, and structures sub-portfolios such as project finance asset-backed securities. This comprehensive approach includes inter-asset correlations and enables straightforward estimation of diversification effects with portfolios other than specialized finance (e.g., commercial lending or retail).

The detailed analytics allow multiple currencies, multiple seniorities of debt and detailed loan covenants. Risks include defaults of counterparties including tenants and construction companies. Hedging includes interest rates, FX and property derivatives at both the deal and portfolio level.

The results and reports generated by the SFS include risk statistics and metrics required for Basel II capital, as well as more traditional metrics, such as the variation in loan-to-value.

Technology

Risk Integrated designed its methodology to optimize capital allocation and maximize returns on risk by applying the industry’s most advanced analytics in a complete enterprise-level IT solution. Risk Integrated’s technology solutions are powerful and sophisticated but effortlessly accessed with a highly intuitive user interface.

The SFS adapts to each bank’s unique way of doing business. We developed our initial system in close cooperation with front-line lending officers, risk managers, and IT managers. Our experience with a wide range of specialized finance projects and portfolios, combined with our fully-qualified proprietary software module library, enables us to implement the SFS rapidly. As a stand-alone solution, before tailoring and data-integration, the institution can be grading their assets within a week of the start of the project. Today the software is live at 6 financial institutions, running as the Basel solution on over $100 Bn in assets.

Our system provides a robust and secure framework that allows the cashflow models, parameters and ratings to be standardized, controlled, and audited. The framework is modular and flexible, and can incorporate any existing models currently being used by the bank, as well as prototypes in development. It is fully open, with the client able to see and modify every assumption and equation.

The SFS is fully scalable. For rating individual deals it operates on a single computer; for rating portfolios of thousands of deals in runs across parallel servers.

Workflow

Risk Integrated products are built on flexible platforms and designed to integrate seamlessly with the bank’s business processes and systems. We work carefully with your lending officers, risk managers, and IT managers to customize our products to meet their needs.

Incorporating the SFS into your workflow improves efficiency, encourages lenders to use the system, and increases security. For example, deal data only needs to be entered one time into the back-office banking system. Details such as tenant rolls can be read in automatically from spreadsheets. The SFS retrieves the live data and allows the lending team to try new credit structures and explore potential pricing options, without additional data entry. For prospective deals the SFS automatically generates flexible reports for lending officers and credit managers to complete the lending and approval process.

The enterprise-level SFS solution seamlessly integrates with the back-office banking system, and offers full control of the workflow surrounding lending. This includes:
	Grade validation by risk management
	Automatic generation of necessary reports such as the credit committee form
	Re-grading before draw-down with automatic portfolio and credit-review grades.
	Auditable, bank-wide access to the risk measurement models generating the metrics     required for Basel II compliance
	Customized reporting for tactical management of assets and strategic management     of the portfolio

Commercial Real Estate

Risk Integrated’s Specialized Finance System uses a simulation-based approach which is extremely well-suited to the needs of commercial real estate lenders. Traditional approaches for measuring risk, such as regression and static cashflow models are inadequate for assessing the highly complex assets in specialized lending. Risk Integrated has developed a simulation methodology which allows the user to use all the available information on each asset, including the deal structure, historical market volatility, forecasts, counterparty credit quality and historical default data, if available.

The outputs are easily understood, including the usual time-series such as income, debt cost, collateral value, debt outstanding. In addition, we provide risk statistics such as the annual profile of probability of default.

The approach is unique in that it takes into account all the complexities of commercial real estate assets. A lender can sit down at his workstation, load deal parameters into the SFS in “scratchpad” mode to quickly evaluate a prospective loan and can try variations in interest rates, covenants and collateral structure. Our commercial real estate model includes the effects of:

The model can take any combination of asset geography or currency. On another level of detail, the SFS can assess deals which simultaneously hold multiple investment properties and development projects. It is unique in that it includes the risk in construction development assets, including cost overruns and delayed sales and letting. This provides the most complete, real world solutions for real estate professionals. Please view the short CRE video of our software system analyzing commercial real estate loans.

Stress Testing

Stress Testing is another method (besides stochastic simulation) for evaluating the risk of a deal.  It provides a clear and objective measure of the risk that is easy to understand.

To conduct a stress test all the risk factors are changed by a fixed amount and the effects on the deal is evaluated.  The change used for a stress test is typically expressed as a number of standard deviations on the time-scale of the model.  In order to capture known correlations factors may be moved in parallel.

The challenge of Stress Testing is determining which factors to stress, which ones should be kept together and by how many factors should be stressed. Please read more about stress testing for commercial real estate portfolios in the articles on our press page.

Basel II Compliance

The SFS has been reviewed by regulators in the U.S, and Europe for Basel II advanced-level compliance. It has also been successfully back-tested against historical default data.

In contrast to traditional approaches for measuring risk, the Risk Integrated Specialized Finance System uses a simulation-based approach that is specifically designed for specialized assets such as project finance. The modular architecture of the SFS allows for cashflow models of any nature and complexity to be embedded seamlessly within the risk engine. We currently offer the following suite of specialized asset models:

The SFS is a complete, fully developed enterprise-level IT solution, not just an Excel spreadsheet or prototype lost somewhere in the bank. It can be used to run Risk Integrated’s cashflow models or to import the institution’s existing prototype models into a robust, fully-auditable, risk engine available from any workstation in the bank or across the internet.

Our project finance capability includes measurement for the following risk areas:

Asset Management

The risk for investors and funds has long been measured using terms such as the Sharpe ratio and, more recently, "value-at-risk". However, Risk Integrated believes measures of fund risk are only of secondary importance to the CEOs of asset management institutions.

Of more fundamental importance is the volatility of the value of the institution itself. The value of an asset management company depends on the volatility of its earnings net of costs.
Risk Integrated has developed an approach to quantify these effects and show the CEO the actions to be taken to increase share price by adjusting the mix of funds, fee structures and cost structures. This methodology has been adapted into our modular simulation framework, culminating in our latest technology offering, the Risk Integrated Specialized Finance System for asset management.

The SFS is a complete, fully developed enterprise-level IT solution, not just a spreadsheet or prototype saved on a hard-drive somewhere in the bank. It can be used to run Risk Integrated’s cashflow models or to import the institution’s existing prototype models into a robust, fully auditable, risk engine available from any workstation in the institution or across the internet.