Speculation

Hedgers
team

2023 PRMC Case Study

CITIBANK TRANSACTION
PROCESSING FOR REVLON
discussion questions
Navigation
3 Syndicated loan understanding

3 Properties 4 Possible advantages

4 Possible disadvantages

5 Portfolio of loans risk management

5 Identification 6 Assessment

7 Managing 7 Monitoring & reporting

8 Eliminating human error situations

8 Reducing the number of errors

9 Minimizing the consequences

12 MATLAB Challenge solution

2
 Syndicated loan understanding Credit risk management Reducing human errors MATLAB Team

How does a syndicated loan differ from a conventional loan, and why do you think Revlon
had to choose this way to borrow funds?

What is a syndicated loan? Properties of syndicated loan

A syndicated loan is offered by a group of lenders who • The organizer bank represents the
Structure
work together to provide credit to a large borrower. interests of all banks during the loan
Lenders form an association called a syndicate — processing. The agent bank represents
the conventional loan offered by only one lender the lenders interests in the process of
servicing a loan

Equality of • None of the syndicate members has any

creditors advantage in collecting the debt
All incoming funds are divided in
$-%
proportion to the amount provided

Unity of • All contracts and agreements are

documentation multilateral and signed by all creditors and
& information the borrower without the possibility of
concluding separate agreements.

3
 Syndicated loan understanding Credit risk management Reducing human errors MATLAB Team

Possible advantages Possible disadvantages

Big loan Difficulties in communication
The loan amount is too large to be issued by one bank It is often challenging to build communication with a large
(especially given the credit quality of Revlon) number of counterparties
At the same time, many lenders can take on some risks
without exceeding their limits

Transactional costs Lack of flexibility

The amount of credit is more suitable for the issue of bonds In case of financial problems or the need for restructuring,
However, the costs associated with issuing bonds are much it is much more difficult to negotiate with many creditors
higher than those of a syndicated loan transactional cost compared to a conventional loan

Counterparties of the 2016

High Immediate Credit Agreement
level of funding
certainty 315 6

Stability Attractive
terms

lenders arrangers

Source: Case 1:20-cv-06539-JMF 4

 Syndicated loan understanding Credit risk management Reducing human errors MATLAB Team

How would you manage the risk of a portfolio of loans? What practices would allow you
to mitigate the risks in a portfolio of loans?
1st step – Identification Macroeconomic and political events
Situation on commodity markets
Impact

Supply and demand on the money market

Change

Interest rates for borrowing

Lending in the economy
Negative effect

Downgrade the fair value

of the portfolio

Source: FRM Program 5

 Syndicated loan understanding Credit risk management Reducing human errors MATLAB Team

2nd step – Assessment

Duration Credit extension options

Market parameters
of the portfolio
Fix-float ratio Prepayment options

Payment terms & schedule Marginal VaR

Probability Time horizon (years)

of default 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
AAA 0 0.03 0.13 0.24 0.34 0.45 0.5 0.58 0.64 0.69 0.72 0.75 0.78 0.83 0.89
AA 0.02 0.06 0.11 0.2 0.3 0.4 0.48 0.55 0.62 0.68 0.74 0.8 0.86 0.91 0.96
A 0.05 0.13 0.21 0.32 0.44 0.57 0.73 0.87 1.01 1.15 1.28 1.4 1.52 1.63 1.76
BBB 0.15 0.41 0.72 1.09 1.48 1.85 2.18 2.5 2.8 3.1 3.4 3.64 3.86 4.09 4.34
Credit parameters BB 0.6 1.88 3.35 4.81 6.19 7.47 8.57 9.56 10.45 11.24 11.9 12.52 13.09 13.57 14.08
B 3.18 7.46 11.26 14.3 16.67 18.59 20.1 21.34 22.45 23.5 24.4 25.1 25.75 26.35 26.92
CCC/C 26.55 36.74 41.8 44.74 46.91 47.95 49.08 49.82 50.48 51.05 51.49 51.92 52.45 52.91 52.97
Investment-
0.08 0.23 0.4 0.61 0.83 1.05 1.26 1.45 1.63 1.81 1.98 2.13 2.27 2.4 2.55
grade
Speculative-
3.6 6.97 9.86 12.23 14.16 15.75 17.06 18.16 19.14 20.04 20.8 21.44 22.05 22.58 23.09
grade
All rated 1.5 2.93 4.17 5.22 6.1 6.83 7.45 7.97 8.43 8.86 9.23 9.54 9.84 10.1 10.36

Source: S&P Global 6

 Syndicated loan understanding Credit risk management Reducing human errors MATLAB Team

3rd step – Risk management + monitoring

Risk management impact on the loan portfolio

-3%
+5.9% Transactions with fixed-to-fixed
Interest rate
-1% Risk & float-to-float IRS
hedging
Net interest income tools Derivatives on macroeconomic
1.9% due to: 101.9% Credit
100% indexes (CPI, GDP, FX)
• use of scoring model
• insurance risks
• hedging risks Loan issued
Cost of risk-active 27
instruments 1089-1165 b.p.
23
0% Expected loss spread RUONIA
provisioning 19
-10% CBR key rate
+5.4% Interest received
15 MOSPRIME o/n
11
100% Net interest loss 4.6% 95.4%
7
due to the lack of risk
management tools 3

Source: Bank of Russia 7

 Syndicated loan understanding Credit risk management Reducing human errors MATLAB Team

What suggestions do you have for anticipating and eliminating human error situations?
Decision tree
Reduce the risk of human errors
Smart legal contracts
The text of the contract and the conditions for its performance will be
set once during the initial filling.

If the covenants change, the smart legal contract will no longer be

active due to the withdrawal of the borrower's signature. The contract
must be updated and signed by all parties again.

For covenant filling, we suggest using both human inputs (as before)
and automatic input by the Bank's unified data repository API. Thus:
• If everything is correct, the contract text change request is sent to
the sides for approval.
• If there are discrepancies between the manual and automatic
completions, a third-party checker looks for an error. After the
correction, the smart legal contract is sent to the partners for
confirmation.

Source: Team analysis 8

 Syndicated loan understanding Credit risk management Reducing human errors MATLAB Team

Minimize the consequences in case this risk realizes

Lenders were surprised by a mistaken payment transfer,

highlighting the need for a system to verify payment
accuracy. One solution is to send an email notification to Email to the lender about transferring debt payments
the counterpart with payment details to compare against (# – written automatically)
another from transaction program is used
the original letter
From: global.loans.support@citi.com
Generating the letter from a
separate program or with the To: #

engagement agreement can

reduce the risk of error. If the Dear #,
contract conditions are met, funds This letter is regarding your loan (Loan Number #) of $# with an annual rate of #% over # days.
are sent at the last hour of the day Today: 1st of March 2023, we are transferring principal and interest from Your debtor in the amounts indicated below:
with an autogenerated letter for
Interest transferred: $#
review by the banker before
Principal transferred: $#
sending to lenders. This allows for
If the payment received by You (#) differs from those mentioned above, please let us know at the contact information
error checking and cancellation if
listed below so both parties can reach an agreeable method.
needed

Source: Team analysis 9

 Syndicated loan understanding Credit risk management Reducing human errors MATLAB Team

Improve the user interface of computerized software

Payment information entry window designed in a minimalistic way

To prevent human error, create a

minimalistic UI with concise instructions,
visually distinctive buttons, and good
feedback

Including a help button for unclear fields

reduces the need for re-reading
documentation, improving employee
coordination and reducing errors

Source: Team analysis 10

 Syndicated loan understanding Credit risk management Reducing human errors MATLAB Team

Insure the employees' civil liability

Liability insurance for employees involved

in money transfers is a cost-effective risk-
taking method compared to forming
operational risk reserves

Analyzing market statistics can determine

relevant coverage and premiums for
policies covering errors and omissions,
fraud, and dishonesty

While insurance increases costs, it

helps avoid extra costs in the long run

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 Syndicated loan understanding Credit risk management Reducing human errors MATLAB Team

Dataset Modelling

• 248 countries and regions

Calculating 1st differences
• From 1900 to 2020

Make Dickey — Fuller test on stationarity

VAR models for 3 countries (Q2)

Special model for China (Q3)

More info in MATLAB challenge presentation!

Source: Team analysis 12

 Syndicated loan understanding Credit risk management Reducing human errors MATLAB Team

MEET THE TEAM Speculation Hedgers

Mentor Risk manager Project manager Market reviewer Data analyst

Baibakov Vladislav Bratenkov Ilia Kuriatnikov Ruslan Mevliutov Mikhail Saik Nikita

Lomonosov Moscow Higher School Lomonosov Moscow Lomonosov Moscow

CFA, FRM State University, of Economics, State University, State University,
Financial Markets ’24 Corporate Finance ’24 Financial Markets ’24 Financial Markets ’24
Head of IRRBB FX Risk specialist, ex-KPMG Deal Market Risk analyst, Quantitative analyst,
Steering and Product One Solution Trading Advisory - Valuation Bank of Russia Renaissance
Development, DMCC Insurance Group
Raiffeisen Bank

13
Q&A