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Natural Language Processing, Part I: Primer

Wake Up Savers, Watch Out Banks - CDs Back In Vogue - Episode 25

Financial Consumer Watchdog's Powerful Investigative Tool Faces Overhaul - Episode 26

SNL Banker

Credit Analytics Case Study: Carillion Plc


Natural Language Processing, Part I: Primer

Sep. 14 2017 — Unveiling The Hidden Information In Earnings Calls

Given the growing interest in NLP among investors, we are publishing this primer to demystify many aspects of NLP and provide three illustrations, with accompanying Python code, of how NLP can be used to quantify the sentiment of earnings calls. In our first example, sector-level sentiment trends are generated providing insights around inflection points and accelerations. The other two illustrations are: i) stock-level sentiment changes and forward returns, and ii) language complexity of earnings calls.

  • What is NLP? – We demystify common NLP terms and provide an overview of general steps in NLP.
  • Why is NLP important? – Forty zettabytes (10^21 bytes) of data are projected to be on the internet by 2020, out of which more than eighty percent of the data are unstructured in nature, requiring NLP to process and understand.
  • How can NLP help me? – We derive insights from earnings call transcripts via NLP measuring industry-level sentiment trends or language complexity of earnings calls, and much more.
  • Where do I start? – Code for each use case is enclosed, enabling users to replicate the sentiment analysis.

Natural Language Processing, Part I: Primer

Download the full report

David Pope, CFA, S&P Global Market Intelligence’s Managing Director of Quantamental Research, recently discussed using natural language processing to unlock new insights in corporate earnings sentiment analysis. Click the player to view the video.


Listen: Wake Up Savers, Watch Out Banks - CDs Back In Vogue - Episode 25

Jul. 17 2018 — CD specials are back. More banks are offering the promotional rates on CDs, or certificates of deposits, to attract new customers. While that is good news for savers, it means funding costs likely will rise even more for banks. The episode shines a light on recent CD rates offered by banks and features commentary on smart deposit strategies from Bruce Hinkle of StoneCastle Cash Management and KeyCorp CFO Donald Kimble.

No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor's Financial Services LLC or its affiliates (collectively, S&P).


Listen: Financial Consumer Watchdog's Powerful Investigative Tool Faces Overhaul - Episode 26

Jul. 17 2018 — Mick Mulvaney, the acting director of the Consumer Financial Protection Bureau, has changed the way the agency operates and reduced enforcement actions against banks. Now, Mulvaney is turning his attention to a powerful tool used by the agency called the civil investigative demand. S&P Global Market Intelligence colleague Brian Cheung discusses how the CFPB uses the tool and what changes could mean for banks and consumers.

No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor's Financial Services LLC or its affiliates (collectively, S&P).


Watch: SNL Banker

Jul. 10 2018 — Transform internal data into vital insight with SNL Banker from S&P Global Market Intelligence. Our solution integrates seamlessly with internal systems to give U.S. community banks and credit unions greater visibility into finances and operations


Credit Analysis
Credit Analytics Case Study: Carillion Plc

Highlights

Co-written by Elijah Harden, Risk Services.

Jul. 05 2018 —

Bankruptcy Summary
Carillion Plc (Carillion), a construction services firm, had “declining profit margins” and “high adjusted debt [due to] reverse factoring and its unfunded pension deficit” according to S&P Global Ratings1 . When Carillion filed for liquidation on January 15, 2018, the company had debt and liabilities in excess of £1.5 billion. Trading in the shares was suspended that same day. S&P Global Market Intelligence’s Fundamental Probability of Default (Fundamental PD) rose to 18.27% in the first quarter of 2017 from 1.32% the previous quarter – the equivalent of the implied credit score falling to ‘ccc’ from ‘bb’2 . An additional 30% increase from Q1 to Q2 2017 brought the Fundamental PD to 24%, six months ahead of Carillion’s liquidation. In the quarter leading up to its compulsory liquidation filing, the median Market Signal Probability of Default (Market Signal PD) was 18%, and reached as high as 29%. The Market Signal PD increased nearly sixfold, from 2.17% to 12.69% (equivalent to a credit score decrease from ‘bb-‘ to ‘ccc+’) during July 2017 in response to a share price decline of nearly 70% during the month. Carillion’s share price fell by 39% on July 10 alone, triggered by a profit warning (the first of three) and the announcement of a strategic review.

Exhibit 1: Market Signal and Fundamental PD Escalation

Source: S&P Global Market Intelligence as of June 11, 2018. For illustrative purposes only.

Business Description
Carillion provides maintenance, facilities management, and energy services to buildings and large property estates, in public and private sectors; infrastructure services for roads, railways, and utility networks. It serves aviation, corporate, financial services, oil and gas, central and local government, defense, healthcare, transport, education, commercial and retail, and residential and leisure sectors. Carillion was incorporated in 1999 and is headquartered in Wolverhampton, in the United Kingdom.

Fundamental Probability of Default Analysis
Upon closer inspection of the Fundamental PD in the third quarter of 2017, business and financial risks were significant problems for the company, with vulnerable and highly leveraged scores, respectively. In the first quarter of 2017, Carillion’s Fundamental PD of 1.32% was better than the UK Construction & Engineering industry median of 4.43%. The Fundamental PD later increased to place Carillion in the worst 25% of the industry by the second quarter of 2017. The most significant factor contributing to the increase in Fundamental PD is Carillion’s EBIT interest coverage, a measurement of the company’s ability to pay interest on debt, which fell to -0.32 in the first quarter of 2017 from 2.75 in the fourth quarter of 2016 (semiannual data was multiplied by 0.5). The elevated Fundamental PD was also due to total equity and cash interest coverage which stood at -£405MM and 0.09, respectively, in the first quarter of 2017 down from £730MM and 2.7 in Q4 2016. Between Q4 2016 and Q1 2017 EBIT decreased by £132MM to a net loss of £100MM and equity decreased by an astonishing £1,135MM. The Fundamental PD illustrates Carillion’s sizable net losses left the company debt ridden and unable to operate.

Exhibit 2: Fundamental Probability of Default Contribution Analysis

Source: S&P Global Market Intelligence as of June 11, 2018. For illustrative purposes only.

Exhibit 3: Key Developments

Source: S&P Global Market Intelligence as of June 11, 2018. For illustrative purposes only.

Copyright © 2018 by S&P Global Market Intelligence, a division of S&P Global Inc.
These materials have been prepared solely for information purposes based upon information generally available to the public and from sources believed to be reliable. S&P Global Market Intelligence, its affiliates, and third party providers (together, “S&P Global”) do not guarantee the accuracy, completeness or timeliness of any content provided, including model, software or application, and are not responsible for errors or omissions, or for results obtained in connection with use of content. S&P Global disclaims all express or implied warranties, including (but not limited to) any warranties of merchantability or fitness for a particular purpose or use.

S&P Global Market Intelligence’s opinions, quotes and credit-related and other analyses are statements of opinion as of the date they are expressed and not statements of fact or recommendation to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security.

S&P Global keeps certain activities of its divisions separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain divisions of S&P Global may have information that is not available to other S&P Global divisions.

S&P Global Ratings does not contribute to or participate in the creation of credit scores generated by S&P Global Market Intelligence. Lowercase nomenclature is used to differentiate S&P Global Market Intelligence PD credit model scores from the credit ratings issued by S&P Global Ratings.

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[1] Source: S&P Global Ratings, Carillion’s Demise: What’s At Stake? https://www.capitaliq.com/CIQDotNet/CreditResearch/SPResearch.aspx?DocumentId=38529831&From=SNP_CRS as published on March 23, 2018.
[2] Lowercase nomenclature is used to differentiate S&P Global Market Intelligence PD scores from the credit ratings used by S&P Global Ratings. S&P Global Ratings does not contribute to or participate in the creation of credit scores generated by S&P Global Market Intelligence.

Credit Analytics Case Study: Carillion Plc

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