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New York Institute of Finance

Advanced Credit Risk Analysis

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Description

How to implement improved credit risk management from the early warning signs to improved valuation of different issuers - taking into account the ever-evolving current market state.

CURRICULUM

Day 1

MODULE 1: WHERE ARE WE IN THE CREDIT CYCLE?

  • The role of credit analysis & risk management
  • Review of recent high profile bankruptcies and defaults of former investment grade companies
  • Fundamentals are back at the fore in today's market
  • Techniques for analyzing the credit cycle
  • The growing role of credit analysis and risk management since the late 90's

MODULE 2: VOLATILITY IN THE MARKET PLACE

  • Review of debt market volatility
  • Impact of increased volatility; greater requirement for portfolio adjustment, investment fund shift towards less risky investments to maintain set volatility parameters

MODULE 3: OVERVIEW OF DEFAULT RATES AND RECOVERY RATES

  • Global default statistics - analysis of frequency of defaults and speed of migration from investment grade to defaulting credit
  • Recovery rates - analysis of trends, what does the secondary market show?
  • Global liquidity review, what is the appetite for stocks at the lower investment grade levels? Response of fund managers to bonds approaching sub investment grade, effect on spreads

MODULE 4: THE RATING AGENCIES

  • Definitions of default - Banks, rating agencies and ISDA
  • Analytical differences - the banks and the rating agencies; ratings based on senior unsecured lending - position of a bondholder; banks can alter risk profile e.g. structuring with triggers, taking security and step ups in the event of a downgrade
  • The rating agency approach - rate through the cycle; rationale and implications
  • Examples where rating agencies lagged the debt and equity markets e.g. Asian sovereign debt crisis of '97, Tyco, Vivendi, Argentina. Trainer facilitated group discussion: Should the rating agencies move towards more frequent ratings?
  • The viscous circle - How rating downgrades can trigger liquidity crises

MODULE 5: INDUSTRY AND CORPORATE STRATEGY

  • Utilizing a risk evaluation framework: market, industry, company specific, management
  • Review of useful approaches: The Porter Model, SWOT analysis, company specific analysis

MODULE 6: ANALYZING MANAGEMENT

  • Strategy overview
  • Measuring management results; are management delivering results, signs to look out for and examples:
  • Importance of controls on management; e.g. composition of the board, management compensation
  • Importance of establishing investor trust in the management team
  • Importance of management communication to investors/ lenders, impact of poor communication
  • ROE, Market Value, Net Book Value, Enterprise Value - can we use these to establish management competence? What are the pitfalls?

MODULE 7: THE BALANCE SHEET AND INCOME STATEMENTS

  • The business cycle and working capital
  • Working capital financing - key principles, CP lines and standby credit facilities - access to the markets and dangers for banks / investors
  • Analyzing goodwill and intangibles - what are they worth
  • Off balance sheet items: leases, partnerships, contingent liabilities
  • Creative accounting and fraud
  • Problems with comparability and consistency of earnings
  • Standard and Poor's new view on ''Core'' Earnings

MODULE 8: THE IMPORTANCE OF CASH FLOW

  • Interpreting cash flows
  • Differences between company produced and derived cash flows
  • Analysis of cash drivers
  • Operating cash flow, net operating cash flow, EBITDA - when and how to use the different cash flow measures
  • Pitfalls of EBITDA

Day 2

MODULE 1: REVIEW OF MARKET TRENDS

  • Size of high yield / LBO market
  • What is investor appetite for high yield / LBO in current market?
  • High yield vs. LBO - differentiating factors; rationale for use and some advantages and disadvantages of combination financings
  • Trading of bank debt - investment grade and high-yield

MODULE 2: EVALUATION OF THE BORROWER/ISSUER

  • Industry and company dynamics, what industry and company characteristics do investors and lenders seek?
  • Depth and experience of management - what are the characteristics of an effective and well-balanced management team?
  • Projected cash flows and stress testing - key measures and how to use them
  • Capital structures and their impact on ratings and spreads
  • Rules of thumb for return requirements at the different levels of capital structure
  • Primary and secondary sources of repayment
  • Assessing negative EBITDA companies

MODULE 3: EVALUATION OF THE ISSUE

  • Structural subordination; how is this achieved
  • The relationship between senior and subordinated lenders
  • Some practical issues which complicate subordination in default situations
  • The role and influence of the equity holder
  • Bond structures - the value of covenants and other features
  • The value of collateral
  • Default statistics and recovery values

MODULE 4: EARLY WARNING SIGNS

  • Credit Cycle
  • Industry
  • Financial Statements
  • Covenant compliance
  • Bank internal warning signs
  • Management warning signs
  • Fall from investment grade to high yield

MODULE 5: MARKET TOOLS

  • Forward looking market tools
  • KMV
  • Credit grades
  • Credit Sights

Day 3

MODULE 1: VALUATIONS AND STRUCTURING

  • If lending money, why do I need to value a company?
  • Use of multiples; Revenue, EBITDA, P/E, P/E to growth
  • Asset-based, Net Book Value, Market to Book
  • Dividend discount model
  • Free cash flow

MODULE 2: COMMON CASH FLOW VALUATION PITFALLS

  • Determining free cash flow
  • Selecting the discount rate
  • Projection periods and terminal values
  • When growth rates change

MODULE 3: COST OF CAPITAL

  • Cost of Debt Review; Yield-to-maturity, Impact of taxes, Bank debt, Straight bonds: Fixed vs. floating rate, Convertible bonds
  • Cost of Equity Review; Preferred Shares, Common Shares, Dividend Discount Model, Capital Asset Pricing Model
  • o beta
  • o equity risk premium
  • Weighted Average Cost of Capital; recap of methodology

WHAT YOU'LL LEARN

ASSESSMENTS OF DIFFERENTIATED ISSUERS AND REAL-WORLD CASES REPLICATE WORKING WORLD RESPONSIBILITY

  • Appreciate the importance of the credit cycle
  • Have a better understanding of the current state of the credit markets
  • Compare and contrast investment grade issuers vs. high yield issuers
  • Gauge company performance using ratio analysis
  • Understand the relationship between qualitative and quantitative aspects of a credit analysis
  • Recognize the effects of accounting irregularities
  • Gain insight into the rating agency process
  • Understand the importance of valuation in credit analysis
  • Become familiar with various market tools
  • Be conversant with various valuation models
  • Sharpen forecasting skills

Who should attend

  • Financial analysts
  • portfolio managers
  • credit officers
  • commercial bankers and loan and lending professionals
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