Warning Signals & Lessons Learned in Corporate Credit

Course Objectives

The aim of this corporate credit master class is to hone the analytic skills needed to appropriately identify and assess credit deterioration and determine a company's ability to improve performance or repair the existing capital structure.
Specifically, participants will be equipped to:

• 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
• Review a company’s funding structure in context of its sector and operating performance to determine whether the existing structure will effectively mitigate credit deterioration or the extent to which it has the potential to reduce lenders’ recovery rates (e.g., risk of structural subordination, risk of deterioration in asset values, complications to the bankruptcy process, etcetera)
• Consider the practicality of solutions designed to stabilise the business and assess alternative options available to minimise future problems / losses for investors.

Target Audience

Experienced credit risk managers, relationship managers, fixed income investors and other finance professionals looking to sharpen their analytic skills and apply them in context of an economic downturn.

The majority of Fitch Training programmes are offered at an intermediate and advanced level. There are no specific prerequisite courses to attend our programmes, however some topic knowledge maybe required. Please refer to the target audience to see what level of prior knowledge is required for a specific course.

Content

ANALYTIC OVERVIEW

Early warning signals

• Symptoms of a deteriorating credit: financial, non-financial and market indicators
• Credit migration and its impact on pricing and market access during turbulent times
• Weakened versus problem credits

Structured analytic approach

• Application of the four-step approach to credit: exposing credits susceptible to deterioration (purpose, payback, risks and structure)
• Risks to repayment: current market conditions and their impact on risk assessment.

CROSSING THE THRESHOLD: TRIGGERS FOR ACTION

Cash shortfalls and liquidity problems

• Defining and assessing liquidity: identifying the most probable short term sources and uses of cash
• Quantifying the degree of refinancing risk and the potential challenges and costs of raising new capital
• Relying on existing “committed” bank facilities or cash as the sole source of liquidity

Covenant breaches

• Characteristics of effective covenants
• Financial versus non-financial covenants: ability to quantify and assess the degree of protection.

EARLY WARNING SIGNALS

Sector indicators

• Understanding the criteria for success for the sector: why certain business models succeed or fail
• Identifying and quantifying key sector cash-flow drivers: sales growth, operating profit margins, working capital and capital expenditures requirements
• Monitoring criteria: articulating key events that could change the outlook for the sector

Business risk and commercial viability

• Assessing corporate strategy in light of the sector drivers: concluding on the short and medium term outlook
• Uncovering key weaknesses: does the company address the industry success factors and how have they positioned themselves vis-a-vis other players within the industry
• Quantifying future performance: establishing and sensitising sustainable EBITDA and operating cash-flow
• Working capital problems and the potential impact on existing liquidity
• Capital expenditures: understanding the investment requirements during periods of economic stress
• Cash burn rates: determining the ability to stem cash outflows when access to capital is diminished
• Evaluating management’s ability to implement a revised corporate strategy: time frame to execution and benefits
• When survival is unlikely: determining a lenders options and timeframe for action

Management and Shareholders

• Companies in crisis: broken strategy, inappropriate funding structure or a combination of the two
• Recognising a weak management team: identify key vulnerabilities

Financial risk and funding structure

• Quantifying liquidity and access to capital
• When additional liquidity is required: the potential for increasing debt, asset sales, alternative funding sources (sale leaseback transactions, asset securitization etcetera), equity injections and the cost and limitations of new financing
• Debt servicing constraints: anticipating the problem and the time frame for action
• The need and cost of new capital to execute the business plan: debt, equity and other stakeholder perspectives.

ASSESSING THE CAPITAL STRUCTURE

Debt structures and a lender’s right to act

• Determining the strengths and weaknesses of facility structures in protecting lenders interests when performance deteriorates
• Purpose: Who is the borrower? Available repayment sources and recovery prospects
• Ranking: ability to maintain seniority, potential for structural subordination and the impact on recovery prospects
• Identifying strong and weak forms of protection
• Evaluating exit options ahead of covenant breaches or other events of default.

Courses of action: influencing management and financial strategy

• The potential to influence management strategy
• Strategic options: sale of a business, reduction in dividend, change in management
• Access to equity capital: most probable sources and willingness to act.