Babson Capital Europe Limited (“Babson Capital Europe” or the “Company”) is authorised and regulated by the Financial Services Authority. Under the current regulatory regime and the Basel II framework, Babson Capital Europe is required to make certain annual regulatory disclosures addressing the Company’s strategies and processes to manage risk and other appropriate arrangements.
Background
Babson Capital Europe is an institutional debt fund manager that specialises in CDOs backed by leveraged loans. The Company invests in senior loans, mezzanine loans and buyout-related high-yield bonds, predominantly in Europe. As at 30th November 2010, the Company had €6.6 billion in assets under management.
In May 2004, Babson Capital Europe (formerly known as Duke Street Capital Debt Management Limited) was acquired by Babson Capital Management, LLC, a subsidiary of the MassMutual Financial Group. The MassMutual Financial Group is a family of financial service companies providing investment management services and individual protection insurance to clients worldwide. As at year end 2009, the MassMutual Financial Group had U.S. $420 billion of assets under management. Massachusetts Mutual Life Insurance Company (“MassMutual”), one of the four primary members of the MassMutual Financial Group, is a mutual life insurance company organised under the laws of the commonwealth of Massachusetts in the United States of America. MassMutual (1) has strong financial ratings from all four of the leading insurance rating services; “A++ (Superior)” by A.M. Best Company, “AA+ (Very Strong)” by Fitch Ratings, “Aa2 (Excellent)” by Moody's Investors Service and “AA+ (Very Strong)” by Standard & Poor's. (1) Massachusetts Mutual Life Insurance Company and its subsidiaries, C.M. Life Insurance Company and MML Bay State Life Insurance Company. Ratings as of 6th December 2010. Ratings are subject to change.
Risk Assessment Processes
Babson Capital Europe manages its risk through a framework of policies and rules in accordance with relevant laws, regulation and principles, including FSA principles and rules. Since 1 January 2008, Babson Capital Europe has in place an Internal Capital Adequacy Assessment Process (“ICAAP”) which identifies and measures the risks which the Company is facing and which evaluates such risks against the level of internal capital in relation to the Company’s risk profile. The ICAAP is reviewed annually and the capital calculation revised to incorporate the latest year’s results into the following year’s capital base. The capital requirements and the terms of the ICAAP are agreed at board level.
Senior management is committed to review the Company’s risk profile quarterly and documenting any changes to the profiles at these dates. Any significant changes to the risk profiles will require the capital base to be reassessed in advance of the annual review of the ICAAP. The Company’s internal controls aim to:
- Create effective and efficient operations;
- Ensure adequate control of risks;
- Create a structure of adequate management;
- Validate the reliability of all financial and non-financial information reported both internally and externally; and
- Comply with relevant laws and other regulations as well as internal policies and procures
Embedded within these controls is the risk monitoring requirement which ensures that the ICAAP provides information that remains in line with the Company's risk profile and its risk preferences.
The risk mapping process aims to be as detailed as is relevant for an organisation such as Babson Capital Europe. The potential risks which the Company could face have been classified by type and key risks identified in each of the relevant categories. The calculations of risk requirements are based upon the scenario stress testing undertaken and reflect calculations based upon expected profitability changes caused by significant changes to the stability of the business.
Current and Projected Financial and Capital Positions
Projecting the performance of the business forward to 2013 is made harder by the unprecedented turmoil in the credit markets from July 2007 and onwards. The liquidity squeeze by way of its severity has made the projections of future growth more challenging. However, we believe that the Company is protected by the fact that almost all of its funds account on a cash-flow / par value rather than market value basis. In addition, the Company manages a diverse set of fund vehicles which adds diversity to income streams. Overall, we believe that this gives rise to stable revenue streams as long as default rates remain low and the funds fully invested.
As at December 2010