The new model is an enhancement of the DCF method to stress-test the vulnerability of future cash flow generation of the borrower in different macroeconomic scenarios.
- The model generates several macroeconomic scenarios diffusing around the market consensus and attaches probabilities to each scenario (Tailor-made MC-type GDP simulation).
- Connection between macro-economic expectations and company level performance is established through industry and company cyclicality functions.
- Future cash flow generation is calculated based on the latest financials of the borrower considering prevailing macroeconomic expectations and relevant industry and market specific factors.
- Comparing future cash flow generation, measured by the Enterprise Value of the borrower, to the amount and collateral of debt will give good indication about Expected Losses.