Credit Risk Evaluation

Coming Soon: The Next Great Vintage of Opportunistic Credit JP Morgan's latest tally of stressed and distressed credit in U.S. markets exceeds $200B across High Yield and Broadly Syndicated Loans. That figure does not include private credit, which I expect to be just as large as HY and BSL combined. When you add Direct Lending to the equation, we are looking at ~$500B+ requiring some form of capital solution in the years ahead. Opportunistic Credit is the flip side of the primary market for HY, BSL, and Direct Lending. When waters are calm, spreads are tight, and new issues flow freely; in this case, there is typically less activity in Opportunistic Credit. That calm is ending. The Morningstar LSTA Leveraged Loan Index has fallen from 98 to 94.5 as the distressed ratio of BSL is 8% and rising. Approximately 12% of private credit borrowers are now generating negative cash flow, with 25% operating with interest coverage below 1.0x. These are not hypothetical stress scenarios; this is the current fundamental backdrop companies must contend with. This statistic rises to ~33% when using actual EBITDA, rather than pro-forma adjusted EBITDA which on average has been adjusted higher by 20%. Capital Solutions will be needed for growth and for turnaround situations across the credit landscape. With the exception of the energy sector, which is performing exceptionally well for obvious reasons, all other 20 industry sectors have issues brewing as JP Morgan shows below. Capital allocators should give special consideration to Opportunistic Credit as I believe this coming vintage will prove particularly rewarding.

TOP 5 AGRIBUSINESS & AGRO-PROCESSING FUNDING OPPORTUNITIES (OPEN TO AFRICA) Below are selected active funding opportunities supporting agribusiness, agro-processing, and agricultural value addition projects across Africa and globally. 1. Common Fund for Commodities (CFC) – Global Funding Call Funding Available: Up to USD 750,000 Focus Areas: Agro-processing and value addition Agricultural commodity development Export-oriented agribusiness projects Farmer cooperatives and SME development Supply chain strengthening and commercialization Deadline Open (rolling applications accepted) Application Link: https://lnkd.in/dhvxbzzb 2. IDC Agro-Processing & Agriculture Scheme Funding Available: Project-based financing (can extend into multi-million USD investments depending on project scale) Focus Areas: Food and agro-processing facilities Poultry, aquaculture, and livestock processing Horticulture and crop value addition Agricultural infrastructure development Industrial-scale agribusiness expansion Deadline: Rolling applications Application Link: https://lnkd.in/dB7DQudv 3. IFC Agritech Modernization Grant Funding Available: USD 100,000 – USD 2.5 million Focus Areas: Agro-processing technology upgrades Climate-smart agriculture solutions Digital agriculture and innovation Supply chain and logistics modernization Equipment acquisition and processing systems Deadline 10 October 2026 Application Link: https://lnkd.in/dnTsQviF 4. FCI4Africa Open Call Funding Available: EUR 50,000 per project Focus Areas: Agrifood innovation and commercialization Agro-processing development Agricultural market access solutions Food value chain efficiency SME-led innovation in agriculture Deadline: 30 June 2026 Application Link: https://lnkd.in/d8kAQ8kX 5. Africa’s Business Heroes (ABH) Funding Available: USD 1.5 million total prize pool Focus Areas: Agribusiness startups and scale-ups Food processing enterprises Agricultural technology ventures Youth-led and women-led agribusiness innovation High-growth African enterprises Deadline: Annual competition (varies by cycle) Application Link: https://lnkd.in/dsE5Xpua #Growththroughintention #AgribusinessFinance #Agribusinessgrowth

S&P Sovereign Rating: Fiscal consolidation, policy continuity and reforms brighten rating outlook • The ruling NDA got a weaker mandate in General Election 2024 compared to 2019 and 2014. However, a week before the election result was announced, rating agency S&P Global revised India’s sovereign rating outlook to ‘positive’ from ‘stable’, noting that regardless of the election result, it expected broad continuity in economic reforms and fiscal policies. While S&P retained India’s rating at BBB-, the outlook upgrade indicated that rating upgrade could follow in the next 24 months • In this series, we analyze global rating agencies’ criteria for sovereign rating and assess how India performs on the same. This report focuses on S&P’s Global’s sovereign rating criteria. Our analysis shows that: 1. The agency assesses sovereigns on five parameters viz. Institutional, Economic, External, Fiscal and Monetary. The first two form a country’s ‘Institutional and Economic Profile’ while the last three form its ‘Flexibility and Performance Profile’ o On ‘Institutional Assessment’, India scores 3, which as per the Agency’s definition indicates generally effective policymaking, evolving checks and balances and generally unbiased enforcement of contracts. On this pillar, India outperforms other BBB- rated countries o On ‘Economic Assessment’, India’s initial score is 5. This is mainly due to very low per capita income, indicating a narrow funding base that weakens creditworthiness. However, India’s faster trend growth compared to peer countries improves its initial score by one notch, taking the final score on this pillar to 4 o On ‘External Assessment’, India scores 1. S&P considers the INR to be an actively traded currency. Given India’s low external debt, on this pillar India far outperforms its peers and is on par with the likes of Germany, Singapore and Switzerland o The ‘Fiscal Assessment’ pillar is India’s Achilles Heel. High general government debt and high cost of debt servicing take India’s score to 6 on this pillar, significantly weaker than other BBB- rated countries and on par with defaulters like Lebanon and Sri Lanka. However, in the latest rating action S&P noted that may raise India’s rating if India's fiscal deficits narrow meaningfully such that the net change in general government debt falls below 7% of GDP on a structural basis. Along with fiscal consolidation, a negative interest rate-growth differential is likely to help India lower the debt burden. o On ‘Monetary Assessment’, India scores 3 outperforming BBB- rated countries. This indicates India’s ‘stabilized arrangement’ exchange rate regime, track record of central bank independence (albeit shorter), reliance on reserve requirements, and somewhat volatile REER Detailed report attached.

Financing Agricultural Trade in Africa: Challenges and Opportunities Agriculture is the backbone of many African economies, contributing to 23% of sub-Saharan Africa's GDP and employing more than 60% of its population. 1. Challenges in Financing Agricultural Trade a. Limited Access to Credit: One of the biggest challenges facing African farmers and agribusinesses is the lack of access to credit. Financial institutions often view agriculture as a high-risk sector due to factors like unpredictable weather, volatile commodity prices, and insufficient collateral. As a result, only 6% of total commercial lending in Africa goes to the agricultural sector. b. Lack of Financial Infrastructure: Many rural areas, where agriculture is most concentrated, have limited access to formal banking and financial services. With 57% of Africans unbanked, smallholder farmers are often forced to rely on informal sources of financing, which can be unreliable and expensive. c. Climate Risks: Africa’s agriculture is heavily dependent on rain-fed farming, making it vulnerable to climate change. Droughts, floods, and other climate-related events can devastate crops and reduce the ability of farmers to repay loans, increasing the risk profile for lenders. 2. Opportunities in Financing Agricultural Trade a. Digital Financial Services: The rise of mobile banking and digital financial services offers a promising solution to the financing gap. Platforms like M-Pesa in Kenya and EcoCash in Zimbabwe allow farmers to access loans, insurance, and payments via their mobile phones. According to the World Bank, 38% of adults in sub-Saharan Africa now use mobile money, providing a platform for innovative financing solutions for the agricultural sector. b. Agricultural Value Chain Financing: This model involves providing financing to all actors along the agricultural value chain, including input suppliers, processors, and exporters. Value chain financing reduces risks for financial institutions by leveraging the relationships between these actors, ensuring that loans are used efficiently and repaid. c. Blended Finance: Blended finance, which involves combining public and private capital to reduce investment risks, is becoming an increasingly popular approach to financing agricultural trade in Africa. In 2020, the African Development Bank (AfDB) launched the Africa Agriculture Transformation Fund (AATF), which mobilizes public funds to attract private investment in agriculture. This fund aims to raise $500 million to support agricultural value chains, boost productivity, and promote exports. Conclusion Financing agricultural trade in Africa presents both challenges and opportunities. While limited access to credit, underdeveloped financial infrastructure, and climate risks hinder the sector’s growth, innovative solutions like digital financial services, value chain financing, and blended finance offer hope for the future.

Most quants are uncomfortable with “made-up” scenarios, but the risk factor approach provides a useful compromise between art/fundamental judgment and science. Instead of historical factor returns, we can specify hypothetical factor returns: ▪️ Current risk factor exposures x Hypothetical factor returns It is common practice to specify shocks to one or two factors, and then propagate these shocks to the other factors. Essentially, we use the betas (sensitivities) between factors. Suppose we shock the equity risk factor by -20%. To propagate this shock to credit spreads, we multiply -20% x the beta between credit and equity (preferably using a stress-regime beta). We can also adjust the propagated shocks for the differences in means (expected return) between factors. This approach also allows shocks to non-financial factors, such as GDP and inflation, as long as we can estimate the stress betas between the non-financial and the financial factors. If we don’t propagate shocks, we assume, very mistakenly, that the other factors would remain stable under stress. For example, if we shock the equity factor in isolation, we assume credit spreads, currencies, rates, etc. would remain stable. Given the high correlations across risk assets, for most portfolios, shocking individual factors in isolation (i.e. without propagation) may underestimate exposure to loss. [From the book Beyond Diversification. This is not investment advice.]

Private credit didn’t replace banks — it entangled them. 👇 ________________________ BACKGROUND: Since 2008, the dominant narrative has been simple: Private credit stepped in where banks stepped out — helped by lighter regulation. But that story is incomplete. Banks and private debt funds aren’t competitors. They’re co-dependent — and the risks are now deeply intertwined. ________________________ HOW BANKS ARE LINKED TO PRIVATE DEBT FUNDS: A great FT piece breaks this down, but here’s the simplified map of how banks fund the very private credit ecosystem that supposedly replaced them: 1️⃣ Upstream – financing the investors ‣ Banks lend to LPs to fund commitments ‣ Banks lend to GPs via subscription lines → All secured by LP capital 2️⃣ Midstream – financing the funds’ assets ‣ "Loan-to-loan" facilities for SPVs at 60–70% LTV ‣ Repo structures: sell loans today, buy them back later ‣ NAV loans → Banks finance the portfolio construction itself. 3️⃣ Downstream – financing the same companies the funds lend to → Banks and private credit funds often finance the same borrower without realising it. ________________________ WHERE SYSTEMATIC RISK EMERGES: Two accelerants turbo-charge the feedback loop: ‣ CLOs → banks buy slices of the very credit risk they once avoided ‣ Significant Risk Transfers → banks hedge loan books with private credit funds And this is where things can get messy — fast: ‣ Borrowers are already highly levered ‣ A closed loop of leverage + shared exposure with almost no visibility on concentration risk ‣ Most private credit loans are floating-rate, amplifying sensitivity to rate shocks ‣ Any downturn (defaults rising or rates staying higher-for-longer) → levered, correlated losses across banks and funds ________________________ So the questions nobody has answered yet: 1️⃣ How much bank capital is truly at risk if private credit hits a stress cycle? 2️⃣ And more importantly — Who actually holds the risk when everyone is financing everyone else? 👉 What do you think? ________________________ 👋 Follow me Andrea Carnelli Dompe' (PhD) for weekly private markets insights 🔔 Tap the bell on my profile and you'll be notified when I post #PrivateMarkets #PrivateDebt #PrivateCredit #Banking #RiskManagement #ECB #FinancialStability

If Moody's Cuts Thailand's Rating, Here's How It Hits Bank Bonds Thailand's new coalition led by Anutin Charnvirakul, may allow pro-growth reforms, but economic challenges are substantial with limited policy space. Moody's negative outlook on the nation raises risks of sovereign downgrade if the economic crisis deepens, which can cascade to banks.  A Moody's downgrade to Thailand's sovereign rating -- should one occur -- would probably trigger ratings cuts for banks, reflecting their sovereign-linked support. It would also lead to downgrades for banks’ subordinated instruments. Bangkok Bank’s dollar Tier 2 bonds are currently rated Baa3 by Moody’s. What’s the impact if it falls to junk? Which Thailand bank’s credit resilience can hold up better than peers against this backdrop? Together with, Tamara Henderson Click here for our views on the Bloomberg Terminal: https://lnkd.in/g7m6zUGx Tamara Henderson: Bloomberg Economics Rena Kwok (郭术甯), CFA: Asian Financials (Credit) Subscribe to my bio (BIO RENA KWOK <GO>) on the Bloomberg Terminal for timely updates on Asian financials credits. #banks #thailand #sovereign #creditresearch #fixedincome

🚨 Mortgage Learning Series #14 Types of ITR — What Really Matters in Loan Assessment A customer walks in. ✔ Income looks strong ✔ Documents submitted ✔ ITR filed Everything seems fine. But here’s the truth: 👉 All ITRs are not equal. 👉 And not all income is bankable income. 💡 Reality of Lending (Jo rarely samjhaya jata hai) In underwriting: 👉 We don’t assess “income shown” 👉 We assess income sustainability + reliability Because… 👉 Loan is not repaid by numbers on paper 👉 It is repaid by actual cash flow behaviour 🔍 TYPES OF ITR — AND WHAT THEY SIGNAL 🧾 1. ITR-1 (Sahaj) — Salaried / Simple Income ✔ Salary / pension ✔ Single house property ✔ Limited complexity 👉 Credit View: ✔ High transparency ✔ Easy to validate ✔ Low deviation risk 🔥 Risk Level: LOW (Most Preferred) 🧾 2. ITR-2 — Capital Gains / Multiple Income Sources ✔ Salary + capital gains ✔ Multiple house properties 👉 Credit View: ✔ Income may fluctuate ✔ Capital gains are non-recurring ⚠️ Key Check: 👉 Don’t overvalue one-time gains 🔥 Risk Level: MODERATE 🧾 3. ITR-3 — Business / Professional Income ✔ Proprietor / freelancer / professional 👉 Credit View: ✔ Income depends on business performance ✔ Cash flow volatility is common ⚠️ Key Checks: ✔ Turnover vs profit consistency ✔ Expense inflation ✔ Banking vs declared mismatch 🔥 Risk Level: MODERATE to HIGH (Case dependent) 🧾 4. ITR-4 (Presumptive Income) ✔ Small business / professionals ✔ Income declared on presumptive basis (8% / 6%) 👉 Credit View: ✔ Simplified taxation ❗ But actual income visibility is low ⚠️ Big Risk: 👉 Income declared ≠ actual income earned 🔥 Risk Level: HIGH (Needs strong validation) ⚠️ WHERE MOST PEOPLE GO WRONG ❌ Taking ITR income at face value ❌ Ignoring cash flow consistency ❌ Not checking banking vs declared income ❌ Overvaluing recent spike in income 🧠 WHAT SMART UNDERWRITERS DO ✔ Compare ITR with bank statement ✔ Check year-on-year trend (minimum 2–3 years) ✔ Identify one-time vs stable income ✔ Understand nature of business / job stability 💥 GAME-CHANGING INSIGHT 👉 High income ≠ Strong profile 👉 Stable income = Bankable profile 🎯 FINAL TRUTH 👉 ITR is not proof of earning capacity 👉 It is only a starting point of assessment 💬 BOTTOM LINE In lending: 👉 We don’t fund income 👉 We fund repayment ability 📌 Tell me — Do you rely more on ITR figures… or do you decode the real income behaviour behind it? #MortgageLearning #ITR #CreditRisk #Underwriting #BankingInsights #LoanProcessing #NBFC #FinancialAnalysis