SME Corporate Credit Analysis

Fitch Learning

Fitch Learning


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Who should attend

Anyone with an interest in building or further enhancing analytic skills needed to assess SME exposures: Financial professionals in a credit risk, asset investment or relationship management role, as well as those engaged in the assessment of counterparty risk from an underwriting viewpoint or trade debtor exposure. Regulators or those in a supervisory role with an interest in understanding the underlying credit assessment needed in the organizations or departments they assess. Participants are expected to be familiar with financial statements.

About the course

The overall goal of this three day workshop is to build analytic skills. Using a structured and systematic approach, participants will learn to evaluate the credit standing of a SME. The workshop will demonstrate how to combine a qualitative assessment of the company and its management with a quantitative analysis of its performance. Simple and effective forecasting tools are used to assess and anticipate the performance of the SME. A case study will form an integral part of the workshop, allowing participants to apply the concepts acquired during the workshop to a real-life scenario.

Key Learning Outcomes:

  • Assess the credit worthiness of SME borrowers using a 4-step approach
  • Evaluate the commercial viability and sustainability of the business model and management's ability to deliver to plan
  • Use a simple cash flow forecasting model to anticipate a company's future performance, sensitise and evaluate assumptions, and interpret their impact on the credit outlook and the ability to service its debt
  • Understand the key funding sources available to SMEs


Day One

Analytic Overview

Introduction of the four-step approach to any risk exposure: Purpose of transaction, sources of repayment, risks to repayment and the structure of debt or exposure needed to safeguard repayment.

  • Application: Identify the true purpose of borrowing, the source(s) and risk of repayment, and the expected structure of the debt for several SME companies using company descriptions and key financials

Macro Considerations

Macro risks in the operating environment and industrial or service sector a borrower operates in.

  • Location: Country risk and market where a borrower operates
  • Sector: Competitive intensity of the sector a borrower operates in – structure, key players, basis of competition, risk of new entrants, substitution and relative bargaining power of buyers and suppliers
  • Long-term growth potential and volatility of demand
  • Application: Illustration case study provided as pre-course material
  • Application: Identify asset configurations, funding structures and earnings of SME companies in different sectors

Management and Ownership

The role and strategy of the management team as well the influence and control of shareholders are assessed.

  • Different types of SME ownership; owners’ and stakeholders’ support and influence
  • Owner competence and integrity; potential effect on the company’s creditworthiness
  • Management’s business and financial strategy and performance goals
  • Quality of financial reporting and management information
  • Application: Illustration case study provided as pre-course material

Business Profile

Understanding a company’s business strategy in the context of sector, country of operation and shareholder requirements.

  • Diversity of services/products, geographical markets, customer and suppliers.
  • Competitive position: ‘Unique selling points’ and a company’s relative market position. Comparative size and possible operating efficiencies.
  • Sector-specific success factors that need addressing. Application: Illustration case study provided as pre-course material.

Financial Profile – Cash Flow and Profitability

Assessment of the quality and stability of earnings and cash flows from operations needed to finance operations and capital investments (‘Business Risk’).

Earnings and cash flow

  • Internal and/or external factors impacting revenues and core profitability
  • Impact on performance by non-operating items
  • Looking beyond EBITDA at sustainability of funds flow from core operation (e.g. funds from operations – before changes in working capital)
  • Application: Illustration case study using additional financial ratio and, where possible, sector peer information
  • Potential additional application: Derive a cash flow statement based on a SME’s balance sheet and profit and loss statement

Day Two

Financial Profile – Cash Flow and Profitability (continued)

Asset investment and efficiency

  • Working capital management, cash conversion cycle and supplier finance
  • Application: Comparison of cash conversion of companies operating in the same sector
  • Cash flow impact of the company’s working capital management stability of cash flow from operations
  • Expansion or replacement asset investment in on-balance sheet fixed and intangible assets
  • Industry-specific utilization measures and off-balance sheet ‘assets’
  • Application: Illustration case study using additional financial information

Financial Profile – Funding Structure and Financial Flexibility

Evaluation of the appropriateness of a company’s funding structure and ability to service its financial obligations (‘Financial Risk’).

Capital structure and funding instruments used

  • SME dependency on short term bank finance
  • Alternative asset-based financing
  • Potential effect of withdrawal of credit insurance, supplier credit or shareholders loans on a SME’s financial position
  • Financial leverage
  • Application: Illustration case study using additional financial information

Financial Profile – Financial Flexibility

  • Debt service capability: Affordability of the level of debt – meeting interest and debt repayments obligations (debt service) from internally generated cash over the past years and based on future cash flow available for debt service.
  • Application: Assessment of the capital structure and debt service capability for several SME companies.
  • Foreign exchange exposure, hedging strategies and potential impact on cash flow and debt servicing capability.
  • Refinancing risk and liquidity: Ability to meet short-term financial obligations as they fall due from current operations. The impact of short-dated debt maturity profiles of SMEs.
  • Seasonal need of funding and the use of account information to detect liquidity problems.
  • Application: Illustration case study using additional financial ratio and sector peer information.

Day Three

Debt Structure

Overview of main elements of debt structures used in SME financing.

  • Exposure profile: The appropriateness of the structure in terms of amount, currency, maturity and type of financial instrument (or commercial exposure)
  • Ranking vs. other obligors: Legal, structural and constructive subordination
  • Collateral and personal guarantees used to achieve seniority
  • Impact of shareholder loans on lenders – the use of subordination/inter-creditor agreements
  • Safeguards: The use of documentation and covenants to mitigate risk
  • Credit pricing: The risk – return profile of the transaction
  • Exercises and examples

Final Group Case Study

The aim of the final group case study is to allow participants to apply the framework and tools of credit analysis to a company and make a concise and conclusive presentation to the group on the final day of the course:

  • Companies used for the group case studies vary per location of the course and will be provided for reading in the evening of the penultimate day
  • Preparation and presentation of a complete credit analysis in small groups of two to five participants takes place on the last day

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SME Corporate Credit Analysis at Fitch Learning

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