Fundamentals of Corporate Credit Analysis
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Analyse credit risks & ensure you can forsee downside risks
This course comprises three days of training in the fundamentals of corporate credit analysis, followed by the two days of training in debt structuring, acquisition finance and LBOs. You can attend either or both modules. After completing this course, you are invited to attend the 4-day Advanced Credit Analysis Course to take your knowledge even further.
Through every business cycle, banks and other financial institutions lose billions of dollars as a result of their failure to analyse credit risk correctly and foresee downside risks. Even if these institutions do not suffer direct financial losses due to default / market movements, they may be receiving an inadequate return for the risks involved. Given the increasing use of leverage by both the private and public equity markets, combined with heightened sovereign and geo-political risks, in-depth credit analysis is essential to avoiding credit and currency losses. Led by a former Lehman Brothers & Credit Suisse First Boston Credit Analyst & Company Valuation Specialist with over 17 years’ experience, this course will show you how to analyse corporate credit risk and how to assess an appropriate return. It does not extend to the analysis of banks, insurance companies or structured vehicles.
During the first 3-day module, you will:
- Review the main types of lending facilities, including loans, bonds and specialist credit products
- Undertake detailed quantitative risk analysis including key credit ratios
- Undertake financial modelling and forecasting in Excel
- Practice how to apply sensitivity analysis
- Analyse qualitative risk: sovereign, industry and company specific
- Analyse the impact of corporate finance activity on credit quality
- Analyse leverage in detail, including the determinants of leverage and the benefits to shareholders
- Review credit ratings and the rating agencies’ approaches
- Analyse the factors that determine credit pricing and assess whether credit investors earn sufficient reward for their risk over the credit cycle
During the second 2-day module, you will:
- Review structural factors such as ownership, double leverage, structural subordination and contractual subordination
- Examine how to structure a firm’s debt funding
- Review the markets and products for acquisition finance
- Review the main considerations for structuring acquisition finance
- Analyse and model leveraged buyouts
- Review documentation, with a particular focus on covenants
Module 1: Fundamentals of corporate credit analysis Day 1
Types of lending
- Different types of credit facilities
- The bond markets - high grade and high yield
- Overview of current volumes and trends in the major credit markets
- Credit default swaps
- Quantitative analysis
- Analysing and interpreting the P&L account
- Background to ratio analysis
- Analysing the income statement as the earning source for interest payments
- Revenues and earnings – sources, sustainability, growth outlook, main risk factors
- Key accounting factors – revenue recognition (IFRS 15), deferred revenue, expense allocation, derivatives (IFRS 9)
- Understanding the nature of the cost base
- Calculating finance income and expense, including derivatives and quasi debt
- Adjusting for exceptional and non-core items – restructuring, provisions, impairments, discontinued items, MTM of financial assets and liabilities, disposal gains/losses, employee benefits (IAS 19), business combinations (IFRS 3), leases (IAS 17), customer loyalty programmes (IFRIC 13)
- Use of EBITDAR, EBITDAX, EBITDA and EBIT – underlying and adjusted
- Pitfalls of using EBITDA or adjusted EBITDA
- Joint venture/associate earnings and NCI
- Ratio analysis: margins (gross, EBITDAR, EBITDA, EBIT, pre-tax, net), interest cover, basic and enhanced dividend cover
Case studies: establishing underlying EBITDA(R) Other case studies to analyse underlying operating performance
Analysing and interpreting the cashflow statement
- Analysing the cash profile of the firm – can the cashflow service the debt obligations?
- IFRC layout – operating cashflow, NWC, investment & financing
- Differences between operating earnings and operating cashflow
- Impact of NWC movements on cashflow – considering seasonality
- Deriving operating and net operating cashflow
- Does operating cashflow cover tax, interest, investment spending, dividends?
- Analysing the main sources and uses of cash
- What are the main cash sources of debt service and debt repayment?
- Primary and secondary sources of debt repayment
- Reorganising the cashflow statement to show CADR
- Cashflow based lending versus asset based lending
- Ratio analysis: Interest and investment coverage; debt service and debt repayment coverage (DSCR), cash conversion ratios, dependence on external financing, cashflow based ROIC, dividend coverage
Case studies: establishing underlying operating cashflow, sources of funding and reliance on external funding Other case studies to analyse underlying cashflow generation
Day 2 Quantitative analysis continued
Analysing and interpreting the balance sheet
- Analysing the balance sheet as the asset source for principal payment
- Consolidation policies
- The nature of the asset base and asset valuations
- What constitutes debt, including derivatives, quasi-debt, pension deficits
- Off balance sheet liabilities - adjusting for securitised receivables, operating leases, vendor funding, recourse financing, contingent liabilities, letters of credit, performance guarantees etc
- Provisions, deferred tax, deferred revenues
- Analysing net working capital
- Liquidity analysis
- The equity base and reserves
- NCI, joint ventures and equity accounting
- Ratio analysis: various leverage ratios, liquidity, current ratio, quick ratio, cash ratio, asset coverage, working capital ratios (inventory turnover, accounts receivable turnover, accounts payable turnover), ROIC, ROE, asset turnover, Dupont analysis
Case studies: analysis of a range of balance sheets from different sectors, as well as of off balance sheet liabilities Other topics in financial analysis
- Analysing the notes to the financial statements
- Assessing debt capacity: balancing growth with asset turnover and financial policy
- Accounting factors; how results can be manipulated
Day 3 Modelling and forecasting in Excel
- Creation of full financial forecasting models
- Creation of assumptions – what are the critical value drivers? Return analysis
- Creation of covenant package
- LBO model
- Sensitivity analysis – base case, management case, downside cases
- Case studies: modelling with Excel of historic accounts, creation of forecasts, calculation and analysis of ratios, creation of covenants. Creating a refinancing package for a cyclical company. Modelling different scenarios in one worksheet.
- The advantages and disadvantages of leverage: debt versus. equity
- Suitability for leverage
- Determinants of leverage
- Impact of shareholder value considerations on credit quality
Business risk analysis (qualitative factors)
- What are the key business risks faced by the firm and are there any mitigating factors?
- Analysis of the sovereign and macro-economic conditions
- What are the levels of and trends in sovereign credit ratings where the firm has its main areas of activity?
- What are the macro-economic conditions, including currency, inflation, interest rates, growth rates, political risks etc?
- Key themes for 2017/18
Analysis of the industry and market
- What is the competitive landscape - Porter’s five forces
- What is the growth outlook? - Industry life cycle and cyclicality
- What is the earnings quality?
- What are the leading indicators?
- What are the pricing dynamics;? demand versus. supply
- Is the business environment changing?
- Capital intensity and the cost base
- Case study: review credit of company in changing industry environment
Analysis of the company’s specific characteristics
- Management, the Board and corporate governance
- Operating, capital and corporate finance strategies
- Competitive advantages and cost position – does the firm create value?
- Product/service offering, differentiation and pricing power
- Diversification versus focus;
- Vertical integration versus sub-contracting
- Buyer power and supplier power
- The 7 Ms
Impact of corporate finance transactions on credit quality
- Mergers, acquisitions, disposals, breakups, demergers, LBOs, etc
- Is the impact positive, negative or neutral ?
- Case studies: impact of M&A on credit quality
- Rating scales and definitions
- Definitions of key financial variables and ratios
- Recovery ratings
- Relevance of sovereign ratings
- Advantages and limitations of the rating agencies
Pricing for bonds and loans
- Review of pricing trends?
- What are the factors that determine credit pricing?
- Are credit investors earning enough to cover their risks over the credit cycle?
Who should attend
- Bank credit officers
- Investment bankers
- Management consultants
- Bond credit analysts
- Fixed income/credit traders
- Fixed income/credit sales people
- Fund managers
- Compliance officers
- Financial decision makers in corporations