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Who should attend
As this is an advanced course, it is most suitable for analysts with two years practical experience, or for those with a strong familiarity of financial statements. It could also be useful for those in banking and finance who have a strong understanding of macroeconomic drivers. While there is a benefit for anyone in banking in taking this course, there should be a strong understanding of corporate financial statements.
About the course
The aim of this three-day course is to refine the analytic skills needed to identify the early warning signals of credit deterioration. It will also help participants to determine a company’s ability to improve performance or repair the existing capital structure. The workshop will draw upon lessons learned from the credit crisis to determine sustainable levels of indebtedness, the robustness of deal structures, and how best to respond to problems facing a corporate client. This course is highly interactive allowing participants to practice the key learning points on several case studies and exercises. Current trends in the market place will be examined to highlight any potential pockets of risk.
Key Learning Outcomes:
- Uncover the early warning signs or red flags during the life span of the loan or bond: financial and non-financial and market indicators
- Identify companies most susceptible to credit deterioration and the factors that will impact the likelihood of default or the need for distressed exchange of debt
- Evaluate the options available to lenders or investors when signs of credit deterioration become apparent
- Determine the strengths and weaknesses of an existing loan structure to improve loan structures going forward
- Set the minimum level of transparency acceptable to make a responsible credit decision
Apply a structured approach to evaluate the credit standing of a company, specifically looking for signals of weakness or potential danger.
Causes of distress
- Macro-economic forces and concerns surrounding current issues
- Sector issues: Sectors most vulnerable to cyclicality, macroeconomic sensitivities and structural changes
- Company specific factors: Why certain companies are more vulnerable than others to credit deterioration
- Exercise: debrief of pre-read: participants come prepared with own examples of failed companies
Early Warning signals
- Symptoms of a deteriorating credit: non-financial indicators, financial indicators and market indicators
- Credit ratings; credit migration
- Market pricing during turbulent times: bond, CDS and share prices
Structured analytic approach
- Application of the four-step approach to credit to expose key early warning signals: Purpose, payback, risks and structure
- Risks to repayment: current market conditions and their impact on risk
- Exercise: identify possible purposes and sources of repayment
Themes of Distress
This section aims to identify the themes of distress. The action(s) taken by the companies and/or lenders are explored through discussion and many real-life examples of actual or potential distress. The focus is on concluding upon lessons learned to avoid future problems.
External Macro-economic and Sector indicators
- Economic cyclicality in various markets and the potential disastrous effect on company performance
- Vulnerability to foreign exchange movements and the effect of sudden fluctuations
- Exposure to commodity price instability and the effect on profitability and cash flow
- Disruptive events that can change the outlook for the sector
- Emerging market risk and issues specific to small, young economies
- Exercise: The impact of the economic cycle on a variety of sectors/the impact of changing commodity prices or FX rates
Challenged business models
- Lack of sufficient scale in an increasing competitive environment; weak part of the supply chain; low added value
- Excessive growth with inability to finance externally; timing of expansion
- Higher operating leverage; inability to transfer increased costs
- Dependency on a small numbers of customers and/or suppliers
- Financially impaired customers, price competition, CAPEX requirements, reliance on other sectors in distress
- Exercise: changing business models and identifying red flags
Management and ownership strategy and behaviour
- Poor management decisions and risk management
- Deficient financial disclosure or reporting
- Complex group structures and cross shareholdings
- Lack of corporate governance, control of executive management
- Failing of succession planning, management style
- Lack of integrity: behaviour, relationships, social responsibility
- Inability of shareholder to support during turbulent times
- Exercise: assessment management strength and weaknesses and shareholder structure/support
Illustration case study: identify early indicators of deteriorating performance in earnings, asset management and cash flow
- Excessive leverage at the top of the economic cycle
- Debt servicing capability: Anticipating the problem
- New money needed to restructure or recapitalize
- Hidden leverage: off balance sheet obligations
- Exercise: hidden leverage and inappropriate funding structures
Poor loan structure and choice of financial instruments
- Hybrid financial instruments or complex derivatives
- Debt denominated in a 'hard currency' while domestic currency weakens
- Illiquid debt instruments
- Structural subordination
- Exercise: anticipate refinancing problems
- Illustration Case Study: review the financial structure and debt instrument(s)
Crossing the Threshold: Triggers for Action
This segment focuses on the most common events that trigger corporate distress and the need to act.
Cash shortfalls and liquidity problems
- Define and assess liquidity
- Quantify the degree of refinancing risk and the potential challenges and costs of raising new capital
- Reliance on existing ‘committed’ bank facilities or cash as the sole source of liquidity
- Characteristics of effective covenants
- Financial vs. non-financial covenants: Ability to quantify and assess the degree of protection
- Exercise: Identify alternatives when companies face refinancing problems
Final Group Case Study
The aim of the final group case study is to allow participants to apply the framework and tools of analysis to a company in the early stages of deteriorating performance.
Videos and materials
Because of COVID-19, many providers are cancelling or postponing in-person programs or providing online participation options.
We are happy to help you find a suitable online alternative.