Fundamentals of Corporate Credit Analysis

Euromoney Learning Solutions

How long?

  • 4 days
  • in person, online

What are the topics?

Euromoney Learning Solutions

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Who should attend

  • Investment bankers
  • Credit analysts
  • Fund managers
  • Treasurers
  • Equity analysts and strategists
  • Compliance officers
  • Equity sales and traders
  • Corporate finance lawyers

About the course

Following the emergence of Covid-19, lenders and investors are once again faced with widespread and material credit deterioration, across sovereigns, corporates and other sectors. 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. This course provides delegates with a solid framework for analysing corporate credit risk, with an emphasis on quantitative analysis and financial modelling. We also cover qualitative analysis, credit ratings, the impact of corporate finance activity on credit quality, LBOs and corporate credit documentation, including covenants.

Aims and 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 about credit ratings and how they are determined
  • how to analyse the impact of corporate finance activity on credit quality
  • the importance of qualitative risk analysis: sovereign, industry and company specific
  • 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 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.

Agenda

Day 1: Morning

Session 1

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

Session 2

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

Session 3

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

Session 4

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

Session 5

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

Qualitative credit analysis

  • The impact of sovereign and macro factors on credit risk
  • Sovereign defaults and rating outlooks
  • Macro-economic outlook
  • Which sectors are currently impacted the most by Covid-19; ESG; disruption?
  • What are the key business risks faced by the firm and are there any mitigating factors?

Case study: establishing the main risks and mitigating factors to a chosen group

Day 3: Afternoon

Session 6

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

Session 7: 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: Afternoon

Session 8: Credit documentation

  • Covenant lite and covenant loose loans
  • Recent trends in credit documentation
  • Aims of covenants
  • The construction clause
  • What is the purpose of the loan and is it related to the repayment sources?
  • Overview of financial covenants
  • Leverage, interest cover, asset cover, cashflow based covenants, cashflow sweeps
  • Overview of non-financial covenants
  • Negative pledge, limits on disposals, demergers, asset transfers, dividends, investment spending, M&A, change of ownership/control
  • Freebie baskets, portability clauses, mulligan clauses, equity cures, carve outs

Case study: review of documentation to assess the strength or weakness of the covenants

Experts

Sarah Martin

Former Executive Director of CSFB and Lehman Brothers, Sarah Martin 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 and high yield markets, the European new issue ...

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Fundamentals of Corporate Credit Analysis at Euromoney Learning Solutions

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