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Business Consulting |
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Credit Analysis and Default Probability Estimation
Minimax has a division geared entirely toward predicting probability of default for firms and/or individual investments. Our default probability analysis provides an opinion on the relative ability of an entity/investment to meet financial commitments, such as interest, preferred dividends, repayment of principal, insurance claims, or counterparty obligations.
This is often invaluable for firms about to go to a major credit rating agency for a rating (or rating change) who would like an unbiased third party to perform the default probability analysis beforehand.
At Minimax, we use a hybrid approach encompassing statistical methods and using both accounting and market data to predict probability of default with structural and reduced-form models.
Structural models consider the liability structure of the firm/investment, along with market prices of its assets (and their volatility), to predict default risk. The models are called "structural models" because they attempt to predict default probability using the firm's capital structure. Structural models owe their origin to Robert Merton's seminal paper in 1974, wherein he realized that a bank loan is simply a put option on the assets of the borrower. Therefore, the equity of the firm is a call option on the assets, where the exercise price and the maturity are given by the face value and maturity of the debt.
We can also provide you with a complex template containing both quantitative and qualitative risk factors, for "hard-to-rate" sectors where historical data or models are lacking.
Call our offices for a free consultation.
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