Structured Credit Portfolio Stabilisation

Challenge

A client with a structured credit portfolio required support to obtain a clear understanding of the portfolio risk and potential hedging strategies. The portfolio consisted of ten overlapping equity and mezzanine CDO and CLO tranches with 3-8 years to maturity that contained over 1,100 underlying reference credits and illiquid, unequal exposures.

Solution

  • A detailed portfolio analysis was undertaken that demonstrated that a subset of 78 underlying reference credits accounted for 95% of the portfolio risk.
  • Hedging solutions and structures were assessed.

Result

  • The client was presented with a portfolio summary and detailed risk attribution report and a range of solutions to hedge the risk.
  • The central solution focused on hedging the risk of two main components i) mark to market exposure of the 78 reference credits and ii) residual default risk.