Investment Risk Management

Cash bond yields tempt. The small print is duration. You earn carry, but you also wear a long fuse. When the back end twitches, months of income can vanish in a day. That’s not drama. That’s math. Here’s the uncomfortable truth: most investors don’t choose duration; spreads choose it for them. A tight spread on a long bond feels safe until rates move. Then you find out your “income” was leverage in disguise. If you can’t hold through a rate shock, you didn’t buy yield. You rented risk. Carry you can keep beats yield you can’t hold. I’d rather own short-dated IG with clean balance sheets than stretch for a few extra basis points in long HY with thin covenants. I want duration where I pick it, not hidden inside credit. If I add length, I pair it with liquid hedges and clear exits. Pride doesn’t pay coupons. Cash does. The curve still matters. Front end gives you carry and optionality. The belly can work when cuts arrive on schedule, not hope. The very long bond is a tool, not a home. Use it for a reason: liability matching, a hedge, or a defined trade. Not because the yield looks neat on a slide. Know your DV01. If you don’t know how much a 25–50 bp move costs you, you’re not managing risk. You’re guessing. A portfolio that bleeds on small rate moves won’t be around for the big win. Size like you plan to survive boredom and shock. Credit spreads look calm—until they don’t. They don’t give you a countdown. They gap. If growth cools or policy bites, refinancing risk shows up fast at the weak end. That’s when owning quality feels “boring” right up until it saves the month. Boring is a strategy. Tactics I like now: keep a T-bill sleeve for dry powder. Skew to short IG over long HY. Add a measured belly position where valuations are fair. Use simple hedges instead of cute structures you can’t exit. If volatility is cheap, rent some. If it’s rich, cut size and wait. And remember: income is not a trophy. It’s a stream that needs defense. Rebalance winners. Trim length into rallies. Add only when the tape gives you paid risk, not just risk. The goal is steady compounding, not yield cosplay. Are you choosing duration, or is it choosing you? What’s your portfolio DV01 on a 50 bp bear steepener? Which bonds still pay you for the credit risk? Where would you cut first if the long end jumps? What lets you hold through a bad week without panic? For more see our Nomura CIO Corner: https://lnkd.in/e4TCax_g Appreciate @Tathagata @Anuragh @Dhrumil for the sharp back-and-forth #fixedincome #bonds #rates #duration #yield #credit #carry #treasuries #riskmanagement #portfolio #CIO #Nomura

Bigger Turbines, Bigger Failures: When Innovation Outpaces Reality Continuing my daily reflections on what drives success in Offshore Wind projects, this thought is unfortunately not one of them. I’ve been in the offshore wind industry for many years, attended a lot of repair campaigns, and seen my share of breakdowns. Failures and breakdowns are part of the game—but what we’re seeing now? This isn’t normal. These turbines aren’t just breaking because of bad luck. They’re breaking because the components are growing faster than reality and technology can keep up. 2024 has been a reality check. Blade failures at Dogger Bank A, Vineyard Wind, and Mingyang’s overhyped 20 MW prototype are proof that the industry’s fixation on bigger turbines is coming apart—literally and the message is clear: •The race to build bigger turbines is outpacing engineering advancements. •Blades and components are being pushed beyond their limits, leading to failures that should never have happened. •This isn’t about innovation anymore—it’s about rushing to claim records and trying to install fewer turbines in projects, no matter the risks. Offshore wind is critical for the green transition, but the industry can’t afford these constant breakdowns. We need to stop pretending bigger is always better and focus on building smarter, more reliable systems. Innovation should push limits, not break them. It’s time to rethink the “bigger is better” strategy before it costs us more than we can afford—or, in the worst case, lives. What’s your take—are we moving too fast for the technology to catch up? #OffshoreWind #BigTurbines #ReliabilityMatters #RenewableEnergy #GreenTransition #LessonsLearned

The offshore wind saga just took a dramatic turn... The Trump administration reversed its order to halt Equinor's $5 billion Empire Wind project off New York's coast. This is huge for the $28 billion US offshore wind industry that was hanging in the balance. Equinor’s 54-turbine offshore wind farm was abruptly paused mid-construction in April 2025, despite being 30% complete and having survived a rigorous four-year federal environmental review. The economics of the project were already razor-thin with <5% profit margins. The pause was bleeding $50 million weekly as specialized vessels sat idle and 1,500+ workers were sidelined and risked losing their jobs. The project was at the brink of financial collapse, when the administration caved to the coordinated influence of New York's Governor, Equinor's CEO, and sustainable energy proponents. What this tells us about the offshore wind landscape: 1. The 'Art of the Deal' is alive and well in energy politics. Projects can be weaponized, paused, and restarted based on shifting priorities rather than consistent policy. 2. Grid reliability plans are deeply vulnerable to policy whiplash. New York grid operators had been counting on these wind farms to provide emissions-free electricity at scale. 3. The market knows this is significant: Ørsted's 18% stock jump after struggling since the initial pause news and Vestas went up 8%. Half a million New York homes will get clean power as originally planned. But the damage is done. Hundreds of millions wasted, investor confidence shattered, and an industry wondering if any project is truly secure. #offshorewind #renewables #energtech #equinor #climatetech #VC

This month highlights the problems with lines of credit (#LOC) in banking - they are costly and asymmetrical as to risk. Below is a common profitability profile for a $500k line at Prime + 1% and 0.50% of fees - it returns a negative 19%. Why? 1. Lines are short (often reviewed and renewed every year). 2. They are not fully drawn resulting in lower interest earning balances. 3. They get drawn when credit risk is elevated (like now). 4. They are costly to monitor & administer. 5. They are negatively convexed as to interest rate risk (they often get drawn more when rates drop as in a recession). For April, you see below that #tariffs have more than doubled the credit risk (expected loss was 0.90% in January) AND line utilization is increasing from 45% to 48%. Note below that the model expects that the BASELINE probability of default (6.32% in our example) is now above the severely adverse level (6.07%). This is because we are seeing 3 to 6 standard deviations of movement in daily interest rate, credit and liquidity curves. Severely adverse cases are usually benchmarked at 3 standard deviations. This level of volatility should concern every banker. Action items: - Use LOCs strategically to support relationships or acquire valuable customers. LOCs will make an unprofitable customer even more unprofitable. - Have a pricing model to price and model LOCs accurately. - Don't treat LOCs the same as term lending with regard to risk in #CECL. PODs, LGDs & expected losses are different. - Consider increasing BOTH capital allocation AND reserve levels above regulatory minimums to offset higher risk in this market. - Create more accurate utilization projections to model credit, interest rate risk and liquidity risk. Banks often underwrite using a static utilization level. However, in markets like this, utilization rises above average. SUBSCRIBE for more risk & lending insights: https://lnkd.in/gYgyRYWh #banking #lending #creditrisk #loans #linesofcredit #creditrisk

Offshore Wind China: Scale Leads, But Reliability Defines the Next Chapter💡 China’s offshore wind capacity tops 45GW—5 years as the global leader (2021-2025). Impressive? Undoubtedly. But the industry’s next leap isn’t about megawatts—it’s about mastering the unforgiving ocean: scale is easy; reliability is the real marathon. 🏃🏃♀️ The hard truth? Many early projects face a shared challenge: marine environments (high salt, typhoons, rough seas) demand more than just "installable" turbines. Unplanned downtime, costly maintenance, and mismatched designs have taught us a humbling lesson: offshore wind doesn’t reward parameter-chasing—it rewards resilience. This isn’t a setback—it’s a reset. The path forward lies in 3 non-negotiable shifts, built on respect for the ocean and engineering rigor: 1. Design for the sea, not the lab: Ditch one-size-fits-all blueprints. Success comes from tailoring turbines to local conditions—whether typhoon-resistant structures or corrosion-proof components. It’s not about bigger machines; it’s about machines that thrive in the wild. 2. Chain-wide collaboration, not siloed innovation: Reliability isn’t a single company’s job. It needs suppliers, developers, and operators to co-create standards—from bearings that last 15+ years to dynamic cables that withstand deep-sea fatigue. No more "good enough" parts; only "ocean-proven" ones. 3. Data as a reliability tool, not just a metric: Every maintenance call, every fault, every storm is a lesson. Use operational data to refine designs, predict failures, and turn "fix-it-after" into "build-it-right"—closing the loop between deployment and innovation. China’s offshore wind story isn’t just about leading in scale—it’s about maturing into a leader in trust. The ocean doesn’t play favorites; it rewards those who respect its complexity. For the global industry: This is how we unlock deepwater potential—together. For China: The next 45GW will be defined not by how fast we build, but how well we endure. 🤔 #OffshoreWind #RenewableEnergy #Sustainability #EngineeringExcellence #EnergyTransition #ChinaLessonsLearned

A slightly longer post from me today. Recently UK Gov has been using the term “security of supply” frequently, often without a clear distinction between what genuinely contributes to it and what can actively undermine it. 👉 UK Gov claims that a new, interconnected offshore wind fleet will strengthen UK security of supply by reducing exposure to fossil fuels. While this may reduce fuel price volatility, it does not in itself improve security of supply, the ability to meet demand reliably under all conditions. 💨 First, Europe wide wind droughts are well documented. Large, slow moving high pressure systems can suppress wind generation across the UK, the North Sea, and much of continental Europe simultaneously, often for days or weeks and frequently during winter peak demand. In these conditions, geographically distributed offshore wind offers limited diversification benefit. Interconnecting wind farms does not change the underlying weather dependency. 💨 Second, hybrid wind linked interconnectors are intrinsically less firm than technology agnostic interconnectors. A conventional interconnector can carry electricity from whatever generating source is available - nuclear, hydro, gas, storage, or renewables etc. A wind integrated link increases available capacity when wind is present but loses that capacity when it is not. 💨 Third, claims that such projects “escape the fossil fuel rollercoaster” conflate price stability with physical security. Wind reduces fuel consumption and average prices over time, but during low wind periods the system remains dependent on firm despatchable generation, including gas. Interconnection does not remove that dependence when weather driven shortfalls affect all connected systems simultaneously, as seen in 2021 when renewable output fell by around a third in the UK and across mainland Europe. 💡 Existing interconnectors to France and Norway have already shown limits, affected by domestic supply pressures, reduced French nuclear availability, and geopolitical considerations. These risks are not an argument for greater reliance on wind; they are a warning that the UK needs more domestic firm generating capacity. At present, we are losing more capacity than we are adding. 👉 In summary, offshore wind interconnection can improve economic efficiency and fuel diversification, but it should not be presented as a major improvement to security of supply. True security depends on adequate firm, dispatchable generation — gas, nuclear, and storage (including hydro). Overstating the security benefits risks obscuring the continuing need for firm capacity in future system planning. Are we, as an island nation, becoming too reliant on other countries and intermittent technologies for our energy needs? Link to BBC article in comments 👇 #energy #securityofsupply #powergeneration

You might hear a lot of excitement about the GW-scale announcements for offshore wind farms. Many players see it as a huge opportunity, but is it really that simple? It all comes down to one important aspect: Project financing. Securing the right support and managing risks effectively are key to success. Here’s a basic breakdown of what needs to be considered: A - Regulations & Permitting Risks: The complexity can vary significantly depending on the market. What most have experienced in the US, explains the risks are unpredictable when democracies take turn. B - Production Assumptions: From the initial resource assessment to long-term availability, energy yield estimation must be realistic. I have had long discussions with friends working in this area, and this is such a tricky and complex topic, for example, changes in turbine models or neighbouring wind projects can affect output. Accuracy here can make a significant difference, as even small errors in assumptions can impact long-term predictions. C - Construction Risks: How many days might be lost if things don’t go as planned? Bad weather or technical issues can lead to delays. Not a show stopper and no delays like nuclear projects here at least. 😉 D - Power (Market) Assumptions: Forecasting electricity prices is always a challenge. With more renewables entering the grid, predicting profitability requires considering a range of scenarios. The choice between CfD, PPAs, or merchant pricing strategies can also influence financial stability. E - Financing Risks: Geopolitical uncertainties and interest rate changes can influence financial outcomes. While these are often beyond control, planning for flexibility and building resilient financial models can mitigate some of the unpredictability. F - Operational Risks: Once built, maintaining reliable operations is essential. Even minor disruptions can affect profitability sometimes. Addressing this phase requires a lot of practical experience and proactive maintenance strategies to reduce downtime. Putting it all together: Now, if you want to put it into an equation, it might look something like this: Success = f (A + B + C + D + E + F) Where: A = Regulatory and Permitting Risks B = Production Assumptions C = Construction Risks D = Power (Market) Assumptions E = Financing Risks F = Operational Risks (often underestimated) The function f() here is a combination of experience, strategic planning, and risk management. Each element influences the others, and achieving project success requires balancing them thoughtfully. Success in offshore wind is about carefully understanding and managing the challenges that come with large-scale projects and as you see in the picture, there are always colourful possibilities, if done right. 😇 📌 💡 https://lnkd.in/e_T-UbP2 #OffshoreWind #ProjectFinance #RenewableEnergy

The Hidden Risk in Returning Borrowers: What Every Credit Analyst Should Watch For! Some borrowers feel like family. They’ve been around for a while, always pay back, and even joke with the loan officers. So when they walk in for another loan, the instinct is: “This is a trusted customer. Just approve it.” But familiarity can be dangerous in credit risk. Case Study: Mr. Johnson, The "Trusted" Borrower Mr. Johnson came in for his third loan in ten months. A known customer. His repayments were always on time, and he always had collateral. A quick approval? Not so fast.  A closer look revealed: i. Loan requests were increasing – Larger amounts, shorter intervals. ii. Repayments were getting tighter – Still paid, but right at the deadline. iii. Collateral was the same as before – But was it still unencumbered? Then came the shocker. That same collateral had been pledged to another lender! Mr. Johnson wasn’t growing his business—he was using new loans to pay off old ones. A debt cycle was forming, and if one thing went wrong, everything would collapse. Key Lessons for Credit Risk Analysts 1. Loan Frequency may be a Red Flag – More frequent borrowing could mean the business is struggling with cash flow. 2. Timely Repayments Don't Always Mean Low Risk – Is the borrower actually earning, or just rolling over debt? 3. Collateral Recycling Can Be Deceptive – Confirm ownership. That car, land title, or inventory might be pledged elsewhere. 4. Debt Stacking is Real – If multiple lenders are involved, the borrower's real exposure may be higher than reported. 5. Growth vs. Survival Borrowing – Healthy businesses borrow to expand, not just to stay afloat. What This Means for Credit Risk Strategy 1. Go Beyond Trust – A known borrower doesn’t automatically mean a low-risk borrower.  2. Verify Collateral Again – Don't assume it is still unencumbered.  3. Monitor Repayment Trends – Small shifts in payment behaviour can signal deeper financial struggles. 4. Check the Business Itself – Is revenue and profit growing or shrinking? 5. A returning borrower is only as good as their financial health today—not their past history. Credit risk is about seeing beyond relationships and analyzing the numbers objectively. Loyalty is great, but it should never overshadow risk assessment. Before approving that "trusted" returning client, take a step back and ask the right questions. What are your thoughts? Have you encountered similar patterns? Let’s discuss. 👇🏽 #CreditRisk #RiskManagement #Lending #FinancialAnalysis #DebtCycle #CollateralVerification #CreditAnalysis #Banking #Finance #BusinessGrowth #SMELending #LoanManagement #RiskMitigation #CreditDecisioning #FinancialRisk

Industry Risk: The Credit Risk Factor Too Many Analysts Ignore (at Their Own Cost) Most credit losses don’t happen because the borrower is dishonest. They happen because the industry failed. Yet during credit analysis, many people focus heavily on: Character Cash flow Collateral …and forget the industry the borrower operates in. That’s a dangerous mistake. What is Industry Risk? Industry risk is the possibility that an entire sector becomes weak, making it difficult for businesses in that sector to survive or repay loans,no matter how hardworking the borrower is. In simple terms: A good borrower in a bad industry is still a risky borrower. Why Industry Risk Matters in Credit Analysis Loans are repaid from future cash flows, not from good intentions. If an industry is: Declining Over-regulated Highly seasonal Sensitive to inflation or FX Dependent on government policy Then cash flow becomes unstable and unpredictable. And unstable cash flow = higher default risk. Examples: 1. Oil & Gas Servicing Company When oil prices crash, upstream activities slow down. Even a well managed servicing firm may lose contracts. 👉 The borrower didn’t fail. The industry cycle did. 2. Import-Dependent Electronics Trader A sudden FX scarcity increases landing costs by 40%. Prices go up, demand drops, margins disappear. 👉 Same business, same owner new industry risk. 3. Private School Business During economic downturns, parents move children to public schools. Enrollment drops, fees reduce, cash flow tightens. 👉 Education is stable, but private education is income-sensitive. 4. Ride-Hailing Drivers / Logistics SMEs Fuel subsidy removal increases operating cost overnight. Revenue stays flat, expenses jump. 👉 Policy risk became industry risk. How to Factor Industry Risk into Credit Analysis 1. Study Industry Trends Ask: Is this industry growing, stable, or declining? Who are the major players? What is killing or supporting this sector? 2. Identify Industry Drivers Understand what controls performance: Fuel prices FX rates Government policies Technology changes Consumer behavior If one driver changes, what happens to cash flow? 3. Adjust Loan Structure High industry risk should mean: Shorter tenor Smaller exposure Stronger monitoring Higher risk premium Same borrower ≠ same loan structure across industries. 4. Stress Test the Business Ask simple but powerful questions: What happens if sales drop by 30%? Can the business survive 3 bad months? How flexible are costs? Key Credit Insight: Credit risk is not only about who the borrower is, but where the borrower operates. Strong character cannot defeat a collapsing industry. Final Thought: The best credit analysts don’t just analyze people. They analyze systems, cycles, and sectors. Because in lending, industries fail first, borrowers follow.