Event Risk

CFA Level 1 - Fixed Income Investments

Event risk is therisk that an issuer will not being able to make a payment because of dramatic and unexpected events. Such risks can affect a single issuer or an entire sector depending on the type of risk.

Event risk falls into three categories:

 a) Natural Disasters or Industrial Accidents that hamper their ability to make payments causing a downgrade in their credit rating.

• Things like floods, earthquakes, or a plant catching fire.
• For example, if a hurricane hits the Florida Coast, all of the insurers that have underwritten policies there may see their bonds take a hit if the damage is large and they have to make big payments to their policy holders.

 b) Corporate Takeovers/Restructurings

• Happens when a company is taken over or restructured, causing the firm to take on new or additional debt that may be too heavy for them to make their payments of interest and principal.
• The company may also have to issue this new or additional debt at higher yields, which will also increase the debt burden.
• This could also cause the rating agencies to get spooked and downgrade the issue.

c)  Regulatory Risk

• Comes in various forms and extends across several industries such as investment companies, insurance companies and depository institutions.
• If a change occurs that causes an entity to divest itself form certain forms of investments, the sudden flood of the divesture of those investments could depress the market and the price of those securities and similar types of investments.

| | Print This! | No comments

Do you like this post?