Credit Risk Evaluation

Today, the countries with the greatest growth potential and most urgent need for investment face the greatest financing gaps and the highest costs of capital. Emerging and developing economies (#EMDEs) face borrowing costs 3–5x higher than advanced economies—even when they have faster growth, lower debt, and strong fundamentals. This high #CostOfCapital — not capital scarcity—is the biggest bottleneck for climate and SDG finance in EMDEs. 📄 Our new CCSI paper, co-authored with Jeffrey Sachs, Ana Maria Camelo Vega, and Bradford M. Willis unpacks the structural forces inflating EMDE financing costs—from flawed #creditratings, outdated prudential regulations, short-term debt, underused guarantees, and misperceptions of risk. The paper lays out 10 actionable pathways to mobilize long-term, affordable capital for climate and development—at speed and scale. 📌 Key Takeaways: - High cost of capital makes capital-intensive clean energy unaffordable where it’s most needed; fossil fuels remain cheaper in many EMDEs because of the high cost of capital despite abundant renewable energy potential. - GDP per capita—not solvency indicators—is the strongest predictor of sovereign credit ratings. Low-income countries are penalized for their poverty, regardless of investment quality or growth potential. Not a single low-income country is deemed credit-worthy by S&P, Moody's or Fitch. - It’s not just a development problem—it’s a missed investment opportunity. The distorted risk-return landscape also holds back large institutional investors who want to deploy capital into the high growth EMDEs—but are blocked by structural risk ratings, regulatory requirements, capital adequacy rules, and lack of de-risking mechanisms. - Today’s dominant credit and debt sustainability frameworks focus on short-term liquidity risks, not long-term structural growth potential. This leads to pro-cyclical investment patterns that funnel capital to already-rich countries and perpetuate underinvestment in high-potential regions. This is a solvable problem! And the solutions are timely and urgent—especially as leaders gather for the #IMF–WorldBank #SpringMeetings next week, the UN #FFD4 Summit in June, and #COP30 this fall. 📘 Read the full paper: https://lnkd.in/eJYAh6WN. We welcome your feedback and engagement. Columbia Climate School Mahmoud Mohieldin Vera Songwe Daniel Cash Ivan Oliveira Tom Beloe Ben Weisman Leslie Labruto Kate Hampton Daniel Firger Lucy Kessler David McNair Rahul Rekhi KEVIN CHIKA URAMA Avinash Persaud Columbia Center on Sustainable Investment Manfred Schepers

With equity volatility creeping up in August, attention is shifting to credit markets given equity volatility is a key component of credit spread valuation models. While the VIX index has moved up to 17% from a low of 13% in July, credit spreads are little changed and have yet to respond to the rise in equity volatility. The valuation challenge for credit would become bigger if the rise in equity volatility persists, if government bond yields rise further or if the downgrade/default cycle evolves. In fact, compared to government bonds, credit looks already expensive as implied by the low level of corporate bond spreads compared to government bond yields. The rise in downgrades including downgrade reviews by ratings agencies suggests that a US credit cycle is already evolving. Rating downgrades including downgrade reviews typically precede defaults and are more timely indicators of credit perception changes. Indeed defaults appear to be following rising downgrades with this year’s volume of defaults on track to be the third highest on record in dollar terms. Rising downgrade risk appears to be already putting downward pressure on total vs. credit spread returns. The other valuation challenge for publicly traded credit markets stems from their comparison with private credit markets. Over the past year activity from public leveraged loan markets has shifted to private credit markets, suggesting price discovery for new credit is increasinglytaking place in private markets. And the yield divergence between private and public credit markets remained wide in July at around 300bp, posing a valuation challenge for public credit markets. Finally delinquencies are rising in consumer credit and commercial real estate. The Trepp US CMBS delinquency rate for office jumped by 338bp since December, suggesting that the deterioration in credit quality in office sector may already have entered a non-linear phase. Moreover, Trepp reported for July a greater rate of delinquency for larger (above $50m) loans, a rare occurrence as typically larger loans have lower delinquency rate. This occurrence happened only twice in the past during periods of economic weakness I.e. in July 2012 and June 2020 when the overall delinquency rate went above 10% in both cases. In all, rising downgrades, defaults and delinquencies suggest that a US credit cycle is emerging which is likely to worsen into 2024 given stalled credit creation and persistently high refinancing costs.

Are US Corporate Bond Spreads Really at 15-Year Lows? It’s a headline we see everywhere: corporate spreads are the tightest in over a decade. But context matters. - Against Treasuries: yes, spreads look near historic lows. - Against swaps: they’re much closer to long-term averages. What’s changed isn’t corporate credit risk; it’s Treasury risk that has risen, making spreads look tighter than they really are. Worth keeping in mind the next time you hear “record low spreads.” Views expressed are my own. #CreditMarkets #FixedIncome #Spreads

🇺🇸 Moody’s Downgrades U.S. Credit Rating: What It Means for Markets & the Economy The U.S. just lost its last AAA credit rating. Moody’s downgraded the nation to Aa1, citing rising debt, deficits, and political gridlock. Here’s what you need to know: Why This Matters: ✅ First Time in History: The U.S. no longer holds a triple-A rating (AAA) from any of the big three agencies (S&P 2011, Fitch 2023, Moody’s now). ✅ Debt Crisis Warning: Moody’s projects U.S. deficits will hit 9% of GDP by 2035 (vs. 6.4% today) due to: - Soaring interest payments - Entitlement spending (Social Security, Medicare) - Weak revenue growth ✅ Market Reaction: 10-year Treasury yields rose to 4.49% — signaling higher borrowing costs ahead. The Root of the Problem: 1️⃣ Unsustainable Fiscal Path - U.S. debt-to-GDP is ~120% and rising - Trump’s proposed tax cuts could add $4.2 Trillion+ to deficits - No credible plan to control spending 2️⃣ Higher for Longer Rates - Fed policy + sovereign rating downgrade = more expensive debt rollovers - Interest costs alone could hit $1.6 Trillion /year by 2033 Market & Economic Implications: 🔸 Treasuries Under Pressure: If demand weakens, US treasury yields could spike further. 🔸 Corporate & Mortgage Rates: Higher treasury benchmark yields drive corporate and mortgage borrowing costs higher. 🚨 The Bigger Risk: This isn’t just about Trump or Biden—it’s a structural crisis decades in the making. Without major reforms, the U.S. could face a debt spiral that becomes difficult to control (higher rates → bigger deficits → more downgrades). Krishank Parekh | LinkedIn

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

The UAE Just Crossed a Structural Threshold in Global Capital Markets J.P. Morgan’s move to phase UAE sovereign bonds out of key Emerging Market indices is not a downgrade. It’s recognition that the UAE’s risk profile no longer fits the EM category. In capital markets: Classification drives allocation. Allocation drives pricing. Pricing drives power. Why It Matters This didn’t happen overnight. It reflects sustained high-income status, a deeper and more liquid sovereign curve, institutional continuity through oil cycles, and a growing global capital footprint. The fundamentals moved first. The risk model is catching up. 1. Income: Structurally High-Income World Bank high-income threshold (FY25/FY26): ~ $14,000 GNI per capita. UAE GNI per capita: ~ $45,000–$50,000. More than 3x the threshold and well above EM medians (~$8k–$12k). By income alone, the UAE sits outside the emerging cluster. 2. Credit Profile: Structural Mismatch UAE / Abu Dhabi rating: AA range. Typical EM sovereigns: BBB to B. AA sovereigns often trade ~100 bps tighter than BBB peers in normal regimes. 3. Live Market Anchor (Feb 24, 2026 – Close) • US 10Y Treasury: ~4.05% • EM hard-currency proxy (EMB-type): ~5.8% That ~180–200 bps spread defines EM risk. High-grade Gulf credit increasingly trades closer to developed markets than to EM beta. Markets are already pricing the divergence. 4. Benchmark Gravity Hundreds of billions are benchmarked to EM sovereign indices such as J.P. Morgan’s EMBI. When fundamentals diverge: • Passive flows adjust • Investor bases evolve • Risk perception recalibrates 5. The Cost-of-Capital Effect Illustrative math: If a sovereign prices 200 bps tighter than EM beta: $10B issuance → $200M annual savings Over 10 years → ~$2B nominal reduction in financing drag Pricing power compounds. And compounding changes long-term strategic capacity. 6. Structural Divergence Income • UAE: ~$45k–$50k • EM Median: ~$8k–$12k Rating • UAE: AA • EM Median: BBB Sovereign Buffers • UAE ecosystem: ~$1.6T–$2T • Most EM peers: materially smaller external buffers Currency Regime • UAE: USD peg • Many EM peers: floating and volatile The Rare Duality Most countries graduate from Emerging Markets as they grow richer. Few do so while managing ~$2T in sovereign capital, deploying globally, and exporting capital at scale. The UAE is both sovereign issuer and sovereign allocator. That duality is rare. Intellectual Balance This doesn’t eliminate exposure to oil cycles or global liquidity shocks. But it structurally compresses risk perception. And perception drives pricing. Final Perspective When markets price you closer to Treasuries than to Emerging Market beta, the debate is over. The risk bucket changes before the headline does. This isn’t about an index. It’s about a balance sheet that has crossed a structural threshold. Maturity isn’t declared. It’s priced. And once priced, it compounds.

A Country’s Sovereign Rating Was Downgraded. Do You Adjust WACC or Exit Multiple? You are midway through a valuation. Suddenly, the sovereign rating drops. The macro risk profile has changed. Now the question is, does this impact the discount rate, the exit multiple, or both? Here is how to approach it: 1. Adjust WACC to reflect increased country risk - Start with the cost of equity. - Update the risk-free rate if yields have moved. - Add a country risk premium to capture the downgrade. - If the company has foreign debt or FX exposure, the cost of debt may need adjustment too. 2. Revisit the exit multiple assumptions - Market sentiment matters. - A downgrade can lead to capital outflows, lower valuation benchmarks, and a compression in trading multiples even for good businesses. - If comps are repricing, so should your exit assumptions. 3. Check if the downgrade affects business fundamentals - Is the company local, export-driven, or dependent on sovereign guarantees? - If the downgrade raises refinancing risk, delays projects, or tightens liquidity, it affects more than just optics. - Cash flows may need revision too. 4. Segment the impact - Not all parts of the valuation are equally sensitive. - For a local infrastructure asset, WACC may rise materially. - For an FMCG exporter with USD revenues, the impact may be muted. - Adjust selectively. Not blindly. 5. Document your judgement clearly - When the macro shifts, your assumptions need to shift too. - But more important than the number is your explanation. - Show what changed, why it matters, and how you quantified it. Follow Pratik S for Investment Banking Careers and Education.

At Rich Data Co we saw a gap in the market for banks to better utilise their customers’ transaction data to understand the financial health of their business and commercial customers. AI plays a key role in predicting the cashflow health of businesses. This enables bankers to understand their customer’s past, present and most importantly, their future. With these capabilities, bankers are able to do 3 things:    1️⃣ Seeing warning signs in real time: RDC applies AI to transaction data to identify cashflow deterioration. Cashflow is a leading indicator for early warning, while many other factors are lagging behind business operation problems. Many banks rely on risk rating changes to identify early warnings. This could be triggered by a review of financial statements (often 18 months old), behaviour data changes or banker judgement. While all these factors are important, they are likely to be too late given it is backward looking. This is like comparing driving a car looking out the front window vs. looking at the rear view mirror.  2️⃣ Identify lending opportunities: A businesses cash flow position goes through ups and downs, especially seasonal businesses such as retailers. The prediction of cashflow health allows bankers to look into the future and provide lending to customers when they need it the most. This also allows banks to assess loan suitability to lend responsibly. Banks need to assess how the business can pay the loan back with the cashflow it generates, i.e. the primary source of repayment. Lending to businesses with a strong cashflow will be less risky for banks and provide affordable loans for the business to grow. 3️⃣ Improving efficiency in the customer review: Continued assessment of customer risk enables banks to drive efficiency in their customer review obligation required by the regulators.   This is a paradigm change in how banks manage their business and commercial lending portfolio. We have seen enlightened banks embracing and leveraging AI to realise significant benefits for both the bank and their customers. This paradigm change moves banks from assessing credit risk only a few times, to ongoing. This is like comparing banks taking a static picture of their customers’ financial health vs. making a movie by ongoing observation of their customers. Static picture vs. a movie of a customer's financial health, which one do you think would be more accurate and timely?     The difficulty in applying AI in this domain is how to achieve cashflow prediction accuracy to a banks lending standard. If you'd like to hear more details, RDC is always open to chat.   https://lnkd.in/gjshBwbb   #FutureOfCredit #MachineLearning #ArtificialIntelligence