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Corporate Credit Analysis
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OVERVIEW
Corporates in many parts of the world, particularly Europe and the US, are faced with multiple challenges which make their operating outlook even more difficult than during the financial crisis of 2008/09. Following the challenges of Covid-19, lenders and investors are once again faced with widespread and material credit deterioration, across sovereigns, corporates and other sectors. A combination of strong cost inflation, significantly higher energy costs, higher and rising interest rates, political uncertainty, worsening geo-political risks and falling consumer demand are making credit analysis even more challenging. The level of uncertainty and disruption look set to remain high for some time. Thus, it is even more important for creditors and investors to understand how to analyse a range of credit risks, in order to avoid credit losses and to earn an adequate risk/reward profile from their exposures.
OBJECTIVES
After completing this course, delegates will learn:
- how to apply a structured approach to corporate credit analysis
- how to undertake detailed financial risk analysis
- how to calculate key credit ratios
- how to undertake financial modelling and forecasting in Excel
- how to apply sensitivity analysis
- how to analyse leverage in detail, including the determinants of leverage
- how to analyse structural factors such as ownership, double leverage, structural subordination and contractual subordination
- about credit ratings and how they are determined
- how to analyse the impact of corporate finance activity on credit quality
- how to analyse and model leveraged buyouts
- about credit documentation and key covenants
Following the course, delegates will be invited to take an optional exam, designed by the course instructor. Upon passing the exam, the delegate will be provided with the Euromoney Certificate in Corporate Credit.
Methodology
This practical course is taught using an inter-active webinar or classroom format that comprises lectures followed by short, practical and inter-active case studies and exercises to reinforce the concepts covered in each teaching session. Emphasis is placed on delegates gaining handson experience of a wide range of corporate credit topics. Delegates must bring a lap-top to the course to carry out the case studies.
WHO SHOULD ATTEND ?
- Credit analysts on the sell-side
- Credit counter-party risk analysts
- Fixed income fund managers
- Asset management credit analysts on the buy-side
- Debt capital markets executives on the sell side
- Investment bankers
- Fixed income/credit traders
- Fixed income/credit sales people
- Private equity executives
- Treasurers
- Equity analysts and strategists
- Compliance officers and internal audit
- Equity sales and traders
- Corporate finance lawyers
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Day 1: Morning
Background to credit analysis
- What is credit analysis?
- How is credit quality and exposure measured?
- Sources of debt service
- Creating a framework for credit analysis
Income statement analysis from a credit perspective
- Analysing and forecasting revenues
- What are the key revenue drivers and what are their trends and risks?
- What are the key cost drivers and what are their trends and risks?
- Fixed and variable costs
- The impact of hedging - currencies, interest rates, commodities
- Calculating underlying earnings and EBITDA
- Dealing with exceptional items, hedging gains/losses, restructuring costs, “one-off items”, gains/losses on disposals etc to work out underlying EBITDA
- Defining finance expense and finance income
- The impact of IFRS 16
- Dealing with equity-accounted entities and NCI
- Taxation issues
- Case studies: calculating underlying earnings; calculating and analysing key operational and financial ratios (margins, interest cover and dividend cover ratios)
Day 1: Afternoon
Cashflow statement analysis from a credit perspective
- The main sources and uses of cashflow
- The level, volatility and predictability of the firm’s cashflow
- Deriving operating cashflow
- including changes in NWC, and dividends from equity accounted entities
- Deriving net operating cashflow – deducting net finance expense and tax paid
- Defining cashflow relating to investment spending, gross and net
- Defining cashflow relating to financing activities
- Does the firm generate sufficient cashflow to service debt and fund capex?
- Are new investments adding value?
- How are cash shortfalls funded?
- Is the firm diverting too much cashflow to shareholders?
- Reorganising the cashflow statement to show CADR
- Case studies: interpreting different cashflow statements; calculating and analysing cashflow ratios (interest cover, debt service cover (DSCR), years to repay gross debt, investment cover, dividend cover, cash conversion ratios)
Day 2: Morning
Balance sheet analysis from a credit perspective
- Consolidation policies
- The nature of the asset base:
- PP&E, intangibles, equity accounted entities and investments current assets
- Financial assets - cash, investments, derivative assets, cash pledges, restricted cash,
- How are the assets valued? What is the outlook for impairments or revaluations?
- The security value of assets
- What are the assets lives and what is the outlook for maintenance and expansionary capex?
- Understanding the firm’s capital intensity and operating leverage
- Current liabilities including short term debt
- Understanding NWC
- Long term liabilities
- Provisions, bank debt, bonds, derivative liabilities, hybrids, supplier finance, leases, shareholder loans, pension deficits, deferred tax liabilities
- Off balance sheet liabilities:, short term operating leases, contingent liabilities, securitised receivables etc
- Calculating an expanded definition of gross and net debt
- Liquidity analysis
- Case studies: working out adjusted gross and net debt; calculating and interpreting key ratios (leverage, liquidity, current ratio, quick ratio, cash ratio, asset coverage, working capital ratios, asset turnover, Dupont analysis)
Day 2: Afternoon
Modelling and forecasting in Excel
- Overview of good spreadsheet practices
- Creation of a full financial forecasting model
- Assumptions, income statement, balance sheet and cashflow statement
- Creation of macro and firm-specific assumptions
- What are the critical value drivers? Can they be modelled?
- Embedding scenario analysis in the forecasting model
- Modelling fixed and variable costs
- Structuring the debt to include flexibility for different cashflow outcomes
- Waterfall debt repayment schedule
- Delayed amortisation, accordian, PIK, PIYC
- Debt repayment and roll-over strategy
- Case studies: ratio analysis; creation of a covenant package and covenant compliance; scenario analysis
Day 3: Morning
Leverage and group structure analysis
- The advantages and disadvantages of leverage
- Debt and quasi-debt versus equity: advantages and disadvantages
- Suitability for leverage
- Determinants of leverage
- Impact of shareholder value considerations on credit quality
- Balancing the credit profile against shareholder and ROE considerations
- Complex and simple group structures
- Ownership: do the owners strengthen or weaken the firm?
- Double leverage
- Structural and contractual subordination
- Impact of structural issues on ratings
Case studies: analysing simple and complex group structures; finding the risks of lending to complex groups
Day 3: Afternoon
Credit ratings
- Different types of corporate rating
- How corporate ratings are determined
- Establishing the industry rating
- Assessing the firm’s position within the industry
- Financial ratios
- Sovereign ratings and the sovereign ceiling
- Notching for structural and contractual subordination, credit enhancement and other factors
Case study: assessing the ratings of a variety of corporates and of different instruments in the group and capital structure
The impact of corporate finance transactions on credit quality
- Mergers and acquisitions
- Disposals
- Break-ups
- Demergers
- IPOs of subsidiaries
- Is the impact positive, negative or neutral to the firm’s credit?
- Case study: analysing the impact of a corporate finance transaction on the borrower’s credit profile
Day 4: Morning
Overview of leveraged buyouts
- Rationale to LBOs
- What makes a good LBO candidate?
- Recent trends in the LBO market
- Purchase multiples
- Share of equity funding and debt structures
- Typical covenants
- Key sources of funding for LBOs
- HY bonds, leveraged loans, uni-tranche funding
- How the HY bond and LL markets have converged in recent years
- Key sources of different types of equity and quasi-equity
- Structuring an LBO – using intermediate HCs and acquisition vehicles
- Determining the debt capacity
- Matching debt to cash flows and the asset base
- Setting up the LBO in an Excel spreadsheet
- Sources and uses of funds
- Modelling the new capital structure in the proforma balance sheet
- The three statement forecasts
- Working out the key ratios
- Modelling for new equity injections and dividend recaps
- Structuring the debt to include flexibility for different cash flow outcomes
- Modelling new loan features - PIK, amortizations, equity kickers, shareholder loans
- Managing the exit – trade sale, dividend recap, IPO, sale to another fund
- Reviewing a comprehensive LBO model and applying scenario analysis
- Assessing returns to equity and subordinated lenders – IRRs, MIRRs, money multipliers
- A quick method of modelling and analysing an LBO, without doing a full model
- Case studies: modelling LBOs in Excel; working out returns over different asset classes; reviewing successful and unsuccessful LBOs
Day 4: AfternoonCredit documentation – focus on covenants
- The construction clause
- What is the purpose of the loan and is it related to the repayment sources?
- Aims of covenants
- What is covenant loose?
- What is covenant-lite?
- Recent trends in covenants in the bond and syndicated loan markets
- Restricted versus non-restricted subsidiaries
- Financial and non-financial covenants
- The importance of definitions
- Testing, baskets and carve-outs
- Value maintenance covenants
- Leverage and limits of indebtedness
- Interest cover
- Limitations on dividends
- Limitations on investment spending
- Limitations on M&A and disposals
- Limitations on sale and leasebacks
- Change of ownership or control
- Grace periods
- Freebie baskets
- Mulligan clauses
- Carve-outs
- How borrowers have exploited carve-outs to put existing lenders at a disadvantage
- Security
- Security parties
- Type of security
- Enforcement
- Cross-collateralisation
- Case study: review of documentation to assess the strength or weakness of the covenants
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Our Tailored Learning Offering
Do you have five or more people interested in attending this course? Do you want to tailor it to meet your company’s exact requirements? If you’d like to do either of these, we can bring this course to your company’s office. You could even save up to 50% on the cost of sending delegates to a public course and dramatically increase your ROI.
If you want to run this course at a location convenient to you or if you want a completely customised learning solution, we can help.
We produce learning solutions that are completely unique to your business. We’ll guide you through the whole process, from the initial consultancy to evaluating the success of the full learning experience. Our learning specialists ensure you get the maximum return on your training investment.
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We have a combined experience of over 60 years providing learning solutions to the world’s major organisations and are privileged to have contributed to their success. We view our clients as partners and focus on understanding the needs of each organisation we work with to tailor learning solutions to specific requirements.
We are proud of our record of customer satisfaction. Here is why you should choose us to help you achieve your goals and accelerate your career:
- Quality – our clients consistently rate our performance ‘excellent’ or ‘outstanding’. Our average overall score awarded to us by our clients is nine out of ten.
- Track record – 10/10 of the world’s largest banks have chosen us as there training provider and we have delivered training across the largest banks and have trained over 25,000 professionals.
- Knowledge – our 100+ strong team of industry specialist trainers are world leading financial leaders and commentators, ensuring our knowledge base is second to none.
- Reliability – if we promise it, we deliver it. We have delivered over 25,000 events both in person and online, using simultaneous translation to delegates from over 99 countries.
- Recognition – we are accredited by the British Accreditation Council and the CPD Certification Service. In an independent review by Feefo we scored 4.2/5 on service and 4.7/5 on Coursecheck
Instructor
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Sarah Martin
Banks and other financial institutions can lose billions of dollars annually due to their failure to analyse and anticipate credit risks correctly. That's where my training course comes in.Biography
Sarah Martin has worked as a financial trainer for over ten years for many major financial institutions in Europe, Asia, the Middle East and Africa. Recent clients include: The EBRD, The EIB, BBVA, Gibbs Business School in Johannesburg, Bahrain Institute of Business Finance, Bank of China, Erste Bank, Raiffeisen Bank, Standard Bank and Mizuho Bank. The delegate profile ranges from graduates to board members. She trains in financial analysis, basic and advanced credit analysis, LBOs, company valuation, financial modelling and distressed debt. The training involves classroom learning and also blended training using videos, webinars and other forms of e-learning. She has a degree in economics from the London School of Economics and stock exchange qualifications from London and New York. A former Executive Director of CSFB and Lehman Brothers, the trainer has spent seventeen years working as an investment banker in Europe and the US. She has principally worked in the credit markets and has experience of the US and European high grade, high yield and mezzanine markets, the European new issue markets, the Asian convertible bond markets and of corporate restructurings of distressed credits. She specialised in the telecoms sector and was closely involved in the structuring, raising and/or trading of bank and public debt for telecoms companies in many countries, including Europe, South Africa, Asia and Latin America. She also has extensive experience of corporate finance transactions, including mergers, disposals, privatisations, IPOs and capital raisings. She has also worked as an expertise witness in financial lawsuits.
