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Early Warning Signals
By the end of this programme, delegates will:
- Be able to recognise early warning signals arising from global, domestic, sectoral and firm-specific factors as well as market signal s and failure prediction models;
- Be able to identify the most common forms of creative and fraudulent accounting, and make appropriate adjustments to reflect a truer view;
- Be able to develop action plans aimed at protecting the lender’s position and restoring the borrower to the good book;
- Be able to develop “Plan “”, “Plan B” and “Plan C” – with the first two being variants on going concern restructurings and the latter involving execution against collateral and/or insolvency;
- Understand the circumstances where a reservation of rights letter should be issued;
- Be aware of the need to enhance the lender’s information base and how this might be achieved via an independent business review, including the challenges with this intervention;
- Understand that the decision on whether to enforce needs to be taken into the context of the relative strengths and wishes of other key stakeholders;
- Be able to conduct a structured approach to exit analysis, leading to a conclusion on which option is likely to deliver the highest present value to the lender;
- Appreciate the weakness of “extend and pretend” solutions, amounting to “kicking the can down the road” and how these can be avoided;
- Develop a clear view on the components of a successful restructuring;
- Be able to reach balanced judgements on whether to provide new money;
- Be able to state the purpose of a standstill agreement, its key provisions and the challenges in participating in such agreement;
- To be aware of the components of a structured assessment of the firm’s viability and be able to apply this to practical problems;
- To be able to develop a financial restructuring proposal based upon the borrower’s ability to pay;
- Understand the need to enhance the lender’s return and be able to identify techniques for this;
- Be able to set negotiating objectives for a complex restructuring.
This course is part of the Debt Restructuring School which has 2 parts:
- Early Warning Signals (Part One)
- Distressed Debt & Restructuring (Part Two)
Prior to Attendance
Delegates will have access to the following video clips, which the trainer has developed to introduce important techniques in managing restructurings, completion of which will be necessary for successful completion of Part One (Days One and Two):
- Managing Multi-Lender Situations, 3 videos with a viewing time of 10 minutes
- Standstill Agreements, 3 videos with a viewing time of 15 minutes
- Independent Business Reviews, 2 videos with a viewing time of 8 minutes
There will also be pre-course reading of case study materials to make the best use of time on the course.
- Each session deals with a specific are of early warning signal identification and delegates formulate appropriate response strategies;
- These will, of course, be driven largely by our perception of the severity of the problem and whether management has fully addressed its root cause;
- Agreement to a viable remedial action plan is a matter for negotiation, and we will arm delegates with the techniques to identify their key negotiating objectives and their strategy for achieving these.
Introductions and course objectives
- Discussion on sectors that have been severely negatively impacted by the pandemic;
- Which sectors are likely to recover/over what time period, which sectors are likely to have been permanently disrupted? Remembering, of course, that our customers could be serving the latter even if their own sector appears resilient;
- How have businesses survived thus far? EG., government supports, running down liquidity, cutting discretionary outflows/what could be the impact of any under-investment?;
- Disruption to supply chains; Volatile and rising commodity prices; Global shortages of some key commodities; Short-time working/lack of skilled workers due to Covid absences; Resurgence of inflation in major economies; Changing interest rate environment.
Case study vignettes
- Presentation of market signals that act as early warnings: share prices; bond prices; CDS.
- Presentation of distress prediction models e.g., Altman Z-scores and Moody’s KMV.
- Delegates then apply the learnings to a core case study company, as summarised below:
The group is a niche supplier of automotive components to premium original equipment manufacturers. It is a little unusual in that both the parent company and a subsidiary have separate stock market listings. The group has public bonds in place as well as lines from relationship banks, factoring and leasing companies. The group’s difficulties were noticed by the markets just a few months after the most recent bond issue – and several months before Covid-19 had come onto the radar.
Session 3 – Geopolitical Factors
- Presentation and discussion of the geopolitical factors that are disrupting/have the potential to disrupt the firms we finance – and, specifically, how they impact the revenues and cost structures of operating businesses;
- Wars e.g., currently in Ukraine;
- Trade wars;
- Economic sanctions;
- Developments in the trading blocs e.g., Brexit;
- Climate agreements
A warehouse finance facility has breached its key loan-to-value covenant. What were the global, domestic and firm-specific factors that caused the problem and how should the lender’s early warning system flag these up?
Should the lender call an event of default and proceed to execute on its collateral? Is this a case where we need to move quickly, or do we have the luxury of time?
What should be our action plan? What are the benefits of issuing a reservation of rights letter? How does the lender’s role an important provider of finance to the sector and its relationships across the value chain impact on our approach?
- Discussion of developments in commodity prices (oil & gas, electricity; aluminium, steel etc.), global shortages of key commodities, labour force disruption and shortages, the resurgence of wage inflation, and the spectre of stagflation;
- We use our proprietary CVP (Cost-Volume-Profit) model to identify the firm’s:
- Degree of operating leverage; Breakeven point; Price sensitivity; Cost sensitivity, and Volume sensitivity;
- We consider the price elasticity of demand for the firm’s products and the ability to pass on higher costs to customers;
- We analyse whether missed sales are forever lost, or simply postponed.
The company is a manufacturer of building materials in MENA. It has approached the lenders for modest, short-term assistance to overcome cash flow disruptions. We now need to enhance our understanding of the causes of the borrower’s difficulties and how these might be resolved in the context of current and future conditions in the global, domestic and sectoral environments.
Would an independent business review (“IBR”) be helpful and, if so, how would we negotiate for the borrower’s cooperation? Are there any aspects of the relationship that might make the lender reluctant to pursue its legal rights?
Based upon further information on the Day 1, Session 4 case study, we follow our proprietary decision tree to decide whether to waive the breach(es) – and what we seek in return. In so doing, we need to evaluate the position of other stakeholders and how they might respond – a high stakes game of chess!
Do we call an event of default and collapse the “house of cards”, or negotiate something less dramatic? How do we assess our potential outcomes from each scenario and select between these?
Continuing with the manufacturer of building materials.
Session 2 – Problematic Business Models
- Presentation and discussion of what makes a solid, sustainable business model;
- Examples of restructurings attempted on cases with solid business models, compared to those without;
- Presentation and discussion of how business models are being disrupted in certain sectors and the relative success of incumbents’ responses
National retailer of photographic hardware and accessories, with a listing on the junior London stock market. They analyse the external environment using PESTEL, Porter’s Five Forces and SWOT techniques. Delegates identify the early warning signals and root causes, and form their high-level opinion of the probability of a successful turnaround. They then develop their remedial action plans.
Session 3 – Exposure to Large Projects
One of the most prominent, proximate causes of a firm’s distress is taking on a project that is very large and risky compared to its available resources. – in other words, it is “too big to chew”. Sadly, managements have been known in these circumstances to use creative accounting techniques to disguise the developing problem, and this can often morph into fraudulent accounting as the difficulties snowball:
- Presentation and discussion of prominent firms whose existence has been threatened by problems resulting from large projects and/or the failure of a significant customer;
- Presentation and discussion of the creating accounting techniques that have been used by such firms, including the difficult in understanding the true position of a construction contractor and manipulation of accrued income and the timing of costs
A leading, stock market-listed construction contractor based in the GCC: delegates assess the rationales for management’s decisions on an initial public offering and deploying the proceeds on a major expansion of its business. They then follow the firm’s financial progress across a critical four-year period, assessing the relative success of the expansion programme together with identifying early warning signals. They develop a plan for deepening their understanding of the firm’s viability and what they need to do to protect the lenders’ position while this is being undertaken.
Following their review of the Chairman’s statement in the firm’s most recent annual review, delegates identify the root causes of the project’s distress together with specifying the early warning signals. In developing their remedial action plan, they will take into consideration:
- The nature of the original construction contract;
- Time and cost overruns;
- Off-spec production;
- Market conditions for supply and demand;
- Import/export incentives and barriers;
- Challenges with negotiating input and offtake contracts;
- Hedging requirements and solutions, and
- What needs to be put in place for the project to achieve viability.
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.
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
BiographyWith more than 30 years’ experience in banking and financial services, Adrian specializes in delivering practical and interactive training programmes in the areas of credit, origination, corporate restructuring, financial analysis, and loan workout up to an advanced level. Before becoming a trainer and consultant, he worked as a regional director for the National Australia Bank Group’s corporate and institutional banking division.