Day 1: Morning

Section 1: Advanced financial analysis for complex credits

1.1 Income statement forecasts and adjustments

• How do income statement entries affect the credit analysis and what adjustments should we make?
• Revenues and costs
  • Considerations for forecasting growth
  • Key drivers and risks
  • The impacts of macro factors, disruption, ESG and technology
  • The impact of operating leverage
• Segmental analysis
• IFRS reported numbers versus management adjustments
• Adjusted EBITDA versus underlying EBITDA; EBITDA add-backs
• Key adjustments to reported numbers
  • Exceptional, non-underlying, non-core and non-recurring items
  • Capitalised expenses – operating, development and interest
  • Amounts relating to discontinued items
  • Accretion expense
  • Leases
  • Defined benefit pensions
  • Hybrid securities
  • Off balance sheet items
• Can losses be hidden in off-balance sheet vehicles?
• Understanding lease expense post IFRS 16
• Taxation – effective, statutory and marginal rates
• Items in the statement of other comprehensive income

• Case studies: using complex accounts to calculate and interpret the gross margin, EBITDA(R) margin, EBIT margin, pre-tax margin, net margin, productivity ratios, interest cover ratios, dividend cover and enhanced dividend cover ratios

Day 1: Afternoon

1.2 Balance sheet forecasts and adjustments

• How do balance sheet entries affect the credit analysis and what adjustments should we make?
• Non-current tangible assets
  • Valuation basis, impairments, replacement cycle
• Intangible assets
  • Recognition, valuation basis, impairments
  • How much of the firm’s cashflow is dependent on intangible assets?
• Shareholdings in equity accounted entities
• Deferred tax assets
• Current assets
  • How inventory valuations impact earnings
  • Receivables – collection trends, accruals, retentions
  • Bad debt provisions and write-offs
  • Liquidity analysis
  • Restricted cash, returnable cash and other financial assets
• Discontinued items
• Current liabilities
  • Dealing with excessive trade payables and over-due tax
  • Overdrafts, RCF, supplier finance, undrawn facilities
  • Deferred income and accrued expenses
• Net working capital – seasonality; how NWC can be manipulated
• Provisions, current and non-current
• Deferred revenues – impact on liquidity of unwinds
• Deferred tax liabilities
• Analysing lease liabilities post IFRS 16
• IFRS 16 exceptions – dealing with leases that are still off-balance sheet
• Differences between a service contract and a lease
• Unfunded retiree liabilities
• Non-recourse debt of subsidiaries and non-consolidated entities
• Dealing with “other creditors”
• Off balance sheet liabilities – contingent liabilities, receivables securitisation
• Defining gross and net debt, including hybrids
• Liquidity – sources, measurement, forecasting
• Does the BV of equity matter? Does negative equity affect the credit profile?

• Case studies: using complex accounts to calculate and interpret key ratios - leverage ratios, liquidity, current ratio, quick ratio, cash ratio, asset coverage, working capital ratios (inventory turnover, accounts receivable turnover, accounts payable turnover), ROIC, ROE, asset turnover

Day 2: Morning

1.3 Cashflow statement forecasts and adjustments

• How do cashflow statement entries affect the credit analysis and what adjustments should we make?
• Are operating earnings turning into operating cashflow?
• What is the impact on cashflow of NWC changes, provisions, equity accounted entities and other non-cash items?
• Is the firm under or over-investing in maintenance and expansionary capex?
• Are investment forecasts consistent with growth forecasts?
• How are leases dealt with in the cashflow statement, post IFRS 16?
• Can the firm cover debt service, tax and investment spending?
• How are dividends funded? Are they sustainable?
• What is the scope for dividend increases and share buybacks?
• Is the firm reliant on external funding?
• How the rating agencies define cashflow

• Case studies: using complex accounts to calculate and interpret interest cover, debt service cover (DSCR), RCF/net debt, years to repay gross debt, investment cover, dividend cover, cash conversion ratios, dependence on external funding

Section 2: Complex group structures and parent and subsidiary rating linkage

2.1 Complex group structures

• Defining complex group structures
• The credit and rating impacts of partial ownership, a high level of NCI and off balance sheet entities
• Proportional debt, earnings and cash flow of entities that are not wholly-owned
• Who owns/controls the debt, assets, earnings, cashflows?
• The impacts of different consolidation methods and how to make adjustments
• The credit and rating impacts of different types of subordination
• The credit and rating impacts of security packages

• Case studies: reviews of complex group structures; assessing the rating notching implications of different group structures

Day 2: Afternoon

2.2 Parent and subsidiary rating linkage

• Credit assessment of groups, the importance of ownership, analysing a group
• Non-recourse projects e.g. associates and joint-ventures
• Non-guaranteed subsidiaries
• Captive finance subsidiaries
• Fitch criteria for associates, j/vs, subsidiaries
• S&P criteria for associates, j/vs, subsidiaries, captive finance subs

• Case study: working out relative ratings for group structures

2.3 Factors that could limit credit risk

• Credit support from third parties
• Guarantees
• Credit enhancement
• Shortfall agreements
• Collateral – value, liquidity, perfection, enforcement
• Reducing exposure through the use of credit linked notes (CLNs)

• Case study: Quiz on factors that could limit credit risk

Section 3: Analysing and understanding various debt products

3.1 Green loans/bonds, social loans/bonds and commodity bonds

• Key features and benefits
• Recent transactions and pricing

3.2 Supplier finance

• What is it?
• Different methods of structuring supplier finance
• How it be used to show lower leverage

3.3 Hybrids instruments

• Convertible bonds, mandatory convertible bonds, exchangeable bonds
• How much equity credit should be given?
• IFRS approach
• The rating agencies’ approaches
• How to adjust leverage and interest cover ratios for hybrids

• Case study: estimating how much equity credit to assign to hybrids

Day 3: Morning

Section 4: Debt structuring

4.1 Financial objectives and achieving an optimal capital structure

• What are the firm’s financial objectives?
• Are they realistic?
• Defining an optimal capital structure
• Reviewing the advantages and disadvantages of equity and debt
• Defining enterprise value and equity value
• Overview of WACC
• The cost of debt, equity and hybrid instruments
• Adjusting WACC for multi-national groups
• Factoring in sovereign risk to the cost of debt and equity

Case studies: Calculating EV and equity values; practicing ke and WACC calculations

4.2 Debt capacity and debt tranches

• What is the firm’s debt capacity?
• Theoretical debt capacity versus market reality and constraints
• Sources of debt service and repayment
• Capital layering – using mezzanine and subordinated debt
• Factoring in HC debt and double leverage
• Who should be the borrower – HC, OpCo or other?
• Using off balance vehicles and products
• Could the firm benefit from some of the debt products mentioned above?
• Assessing repayment capacity for amortising debt
• Managing the capital structure for a cyclical firm
• How will new financing change the firm’s capital structure, WACC, eps, credit ratings?

• Case studies:  Using a financial forecasting model to change the firm’s capital structure and assess the impacts on credit ratios. Undertaking scenario analysis to stress test the cashflow forecasts

Day 3: Afternoon

Section 6: Analysing distressed firms

6.1 Early warning signs of distress

• Overview of recent trends in downgrades, default and distress rates
• The impact of Covid-19 on different countries, sectors and firms
• Background and definitions
• Causes of distress and common early warning signs
• Macro and sector signals; event risks
• Analysing the financial statements and notes of distressed corporates
• Income statement and operational signs
• Cashflow signs - prospective and actual lliquidity
• Balance sheet signs

• Case studies: spotting early warning signs and analysing distressed credits

6.2 What to do in the event of distress and potential restructuring solutions

• Is it a liquidity problem, a leverage problem or a viability problem?
• Speculative grade liquidity ratings
• Acting on early warning signs if there is no covenant breach
• Amendments and waivers
• Advantages and disadvantages of calling an event of default
• Options for restructuring and recovery
• Does the firm have any residual equity value?
• Could it have a positive equity value in future?
• Is it worth saving? Should the lenders advance additional funding?
• Operational restructurings
• Restructuring the borrowing base without debt write-offs
• DIP funding and the use of the super-senior RCF
• PIK and extended maturities; cashflow sweeps
• Equity issuance, shareholder loans and equity cures
• Restructuring the borrowing base with debt write-offs

• Debt for equity swaps, debt for debt swaps, debt forgiveness, discounted debt buybacks

• PIK, PIYC
• Modelling debt restructuring options for distressed firms
• Review of models for PD and LGD from Moody’s, KMV and CreditMetrics

• Case studies: modelling new borrowing facilities and debt restructuring solutions for distressed firms

Course summary and close

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