The structure of loan funds differs considerably from the other product types in our business division. Loan funds finance a broad range of assets and projects, such as real estate, infrastructure projects (e.g. wind farms), aircraft and ships.
Credit risk is particularly important when investing in loans, as a deterioration in borrower credit ratings or default can have a negative effect on the loan fund. Risk management for these products therefore mainly focuses on monitoring the ratings of the exposures and ensuring that suitable collateral is provided, so that an in-depth assessment of the current creditworthiness and future changes can be performed for each borrower. Loan exposures are also monitored using a variety of leading indicators to identify signs of deterioration in financial circumstances and the value of the collateral provided.
These analyses make use of the extensive back office lending expertise that Deka Immobilien has gathered. We use a variety of scenarios ranging from rating downgrades across all loans to defaults on individual loans to ensure that our assessments of the effects of credit risk on our loan funds are optimal.
In addition to credit risk, market price risk is also important for loan funds. Loan exposures are subject to currency risk, interest rate risk and spread risk. Derivatives can be used to hedge currency and interest rate risk at the fund level, and are also included in risk measurement. Our risk management system also uses a variety of stress scenarios that are continuously adjusted during periods of capital market stress to analyse potential changes in market price risk.
Collateral agreements associated with a loan are another source of risk. In some cases, this risk can be unilaterally triggered by the borrower, such as if the borrower terminates the loan agreement. We already take measures to counteract this risk when assessing whether to invest in a loan by including any collateral agreements in the assessment. A Monte Carlo simulation is used to simulate future changes in capital market parameters, such as interest rates and spreads. A migration matrix is also used to assess potential rating changes for the loans.
Risk assessment of loan funds
Similar to real estate funds of funds, sustainability risks are monitored using a scoring model developed specifically for this purpose that takes into account the special features of the assets financed by the loans. Physical and transitional risks for real estate financing are measured in a manner similar to real estate funds. With respect to infrastructure, the focus is on renewable energy loans. For ships and aircraft, attention is paid to satisfying the latest technical standards. Limits based on the type of loan are also used to help with risk measurement.