Advanced Corporate Credit

Please note this course runs at an accelerated pace and is only suitable for those with an MBA, CFA or a minimum of 3 year credit analysis experience. Otherwise we recommend our four-day Corporate Credit Analysis course which allows more time to practice the techniques taught.

Course Objectives

To revise and enhance analytic skills in order that participants will become:

• Structured and focused in their approach to analysing corporate credit risk.
• More effective in assessing the success of a company’s business model and the appropriateness of a company’s capital structures (i.e., the degree of liquidity and the ability to service debt)
• Better equipped to critique the terms and conditions of credit instruments to ensure that they reflect the commercial needs of the business and protect the debt provider’s position.

The course makes extensive use of case studies, live examples and exercises to ensure that the training is highly interactive, practical, topical and challenging. Case studies are drawn from a number of countries and industries and provide participants with the opportunity to practice the application of the analytic frameworks and tools in context. The emphasis is on developing critical judgement; participants are required to be focused, practical and realistic in their approach.

Target Audience

Experienced lending bankers, fixed income professionals and fund managers involved in the provision of credit.

Participants should have a firm grasp of accounting and have credit experience before attending this programme.

Content

PURPOSE~ PAYBACK MODEL: A STRUCTURED ANALYTIC APPROACH

• A 4-step approach to credit analysis: Purpose, Payback, Risks and Structure
• Determining the purpose: evaluating the borrowing entity and assessing the potential for structural and / or economic subordination
• Assessing availability of repayment sources: refinancing/access to markets, cash-flow profits, market value of assets
• Evaluating risks to repayment: uncovering the risks that could jeopardize repayment
• Structure: evaluating the risks in the exposure profile, ranking, safeguards and pricing

STEPS 1 AND 2: PURPOSE AND PAYBACK

• Purpose: Payback: the challenges to identifying and analysing credit risk
• Using purpose, payback and risks to repayment to determine the appropriate debt structure (product, maturity, amortisation, currency, covenants, other structural features)

RATINGS AND RELATIVE VALUE

• Overview: understanding corporate debt ratings, the criteria adopted and analytic approaches applied.
• Understanding how credit ratings impact market access and limit available repayment sources and debt structures
• The impact of cyclicality on default and recovery rates
• Using default and recovery statistics to evaluate an appropriate level of return (risk adjusted return on capital)
• Understanding why bonds might trade "outside" their rating

STEP 3: RISKS TO REPAYMENT

The operating environment

• Statement logic: understanding how the business dynamics impact the asset configuration, funding structure and earnings of companies in different sectors
• Analysing sector specific drivers: how companies operate, key competitors, the basis of competition, impact of economic / political factors and the outlook for growth and earnings
• Assessing the characteristics necessary for industry success and a company's ability to create and sustain a competitive advantage
• Sector specific analysis and the key measures of performance: understanding profitability, investment needs, funding structures and cash-flow dynamics of companies in different sectors
• Using the business cycle to create expectations about balance sheet structures and income statement performance

Evaluating business risk

Assessing commercial viability: Asset investment and earning dynamics

• Evaluating the business model: a practical approach to assessing the success of management’s strategy
• Use of peer analysis to bench-mark performance: focusing on ratio and cash-flow tools to analyze asset efficiency
• Understanding how differences in the business model impact the peer analysis
• Quantifying performance looking beyond EBITDA: defining, calculating and using operating cash-flow to analyze profitability
• Assessing a company’s ability to sustain EBITDA and free cash-flow through economic and business cycles
• Assessing performance, operating profits versus operating cash-flow
• Different accounting conventions: looking beyond the numbers and uncovering misleading accounting practices

Forecasting the business requirements

• Determining key industry drivers and company specific variables: using qualitative and quantitative tools as the foundation to assess future performance
• Assessing forecasts of operating performance and asset investment requirements
• Understanding the cash-flow dynamics of growth

Evaluating financial risk

Evaluating financial strategy

• Using business risk to gauge the appropriate level of financial risk
• Identifying an acceptable candidate for leverage
• Understanding a company’s financial strategy: ratings targets and shareholder value considerations
• Corporate treasury objectives: tenor matching, funding and liquidity needs
• Credit strength and its impact on access to markets

Measuring financial risk - liquidity

• Assessing liquidity and a company’s financial flexibility: on and off balance sheet and cash-flow indicators
• Understanding the limitations of traditional liquidity measures (current ratio, quick ratio and working capital)
• A practical approach to evaluating liquidity – identifying a company’s sources and uses of cash (base case, best case and downside case)
• Using the liquidity analysis to determine the need for refinancing
• Determining the causes of a liquidity squeeze and anticipating a company’s ability to react (e.g., access to capital, ability to sell non-strategic assets, third party support)

Measuring financial risk - solvency (ability to service debt)

• Measuring solvency: leverage ratios versus cash-flow tools
• Understanding financial risk: the limitations of traditional ratio analysis
• Using cash-flow statements to quantify the effects of business decisions on debt servicing ability
• Using discounted cash-flows to quantify a company’s debt capacity
• Distinguishing between debt and borrowing capacity to quantify refinancing risk
• Anticipating future borrowing requirements and potential over-reliance on market access and refinancing

Understanding the credit implications of various forms of capital

• Debt products: distinguishing features of strong versus weak credits
• Understanding the effects of market demand on the amount and type of capital raised, the degree of structural protection and the impact on pricing
• Understanding how other forms of capital may enhance or diminish a creditors position
• Commercial paper: the benefits and the risks
• Bank debt versus bonds: terms and conditions compared, understanding how bondholders are potentially at risk to subordination by bank lenders
• Off balance sheet financing: the implications for other debt providers
• Equity: understanding the difference in viewpoints (earnings growth versus credit quality, upside and downside returns)

Assessing management and shareholders

• Management competence: how to evaluate and measure performance
• Corporate aims and goals: their effect on the company's future creditworthiness
• Evaluating shareholder structure, support and influence
• Realizing the next step: managing the business in context of its strategic goals

STEP 4: DEBT STRUCTURE

• Framework for assessing the structure of a debt instrument: debt profile, seniority, safeguards and pricing
• Seniority: identifying the borrower to ascertain legal, structural and economic subordination
• Unravelling the corporate structure
• Challenges to uncovering ranking and maintaining seniority
• Evaluating safeguards

APPLIED ANALYTICS: COMPLEX CASE STUDY

Part I: Assessment of historical performance

• Understanding the organisational structure and the credit implication
• Determining the sources of repayment
• Review of the operating environment and the impact on the company and its peers
• Commercial viability: determining the success of the business model relative to peers
• Funding structure: assessing the company’s historical ability to service debt and meet non-discretionary expenditures

Part II: Evaluating sources of repayment

• Looking for indicators of quality and value
• Assessing existing liquidity
• Determining the ability to repay

Part III: Conclusions

• Forecasting future cash-flows and debt capacity
• Quantifying the key sensitivities and their impact on the ability to service debt
• Conclusions on the credit outlook and the key risks to taking credit exposure.

Workshop Times

Below are typical timings for our courses; upon registration we shall advise you if these have changed.

Breakfast: 8.30am
Course Start: 9.00am
Course End: Between 5.00pm and 5.30pm

Lunch starts between 12.30pm and 1.00pm, and lasts no longer than 1 hour.
Short breaks of 10 - 15 minutes are taken mid morning and mid afternoon.