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2.2.3 Appendix

Model Assumptions

  • EXIT_COST – 0.8. We assume the cost of liquidating company is proportional to the firm value.

  • RSTR_COST – 0.1. We assume the cost of restructuring debt is proportional to the debt outstanding amount.

  • SOFT_DEFAULT_THRESHOLD - . The lender is assumed to take actions to protect the investment when DSCR goes below this value.

  • HARD_DEFAULT_THRESHOLD - . The company goes defaulted immediately when DSCR goes below this value.

  • MAXIMUM_VOL – 150%, the maximum value of CFADS implied volatility. It is a bit meaningless to have implied volatility more than this value, as the risk is too high.

  • MINIMUM_VOL – 5%, the minimum value of CFADS implied volatility. Actually, there is no big difference in term of credit risk when the volatility goes smaller than it.

  • MAXIMUM_PD – 1 – MINIMUM_PD

  • MINIMUM_PD – 0.0001%, which is about 0.01% chance of default in the 100 years. Both of MAXIMUM_PD and MINIMUM_PD are used because the CFADS scenarios are discretised.

  • VOL_ADJUSTMENT – 0.8, constant and calibrated as in Append 5 to adjust the PD inline with the historical experience.

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