Capital Structures: Impact on Creditworthiness

Course Objectives

Specifically it aims to equip participants to:

• Evaluate the key structural features of a company’s existing and new financial obligations and their potential effect on the company’s financial flexibility, cash-flows and credit quality/rating
• Understand how to assess various types of debt instruments in terms of advantages and disadvantages to the issuer and the investor, when the instrument should be used and when it maybe inappropriate, focusing on bank debt, hybrids, bonds/notes and asset securitization
• Identify the key drivers of company and sector performance and the potential impact on profitability, cash-flow, access to capital, etc. in order to assess a company’s ability to meet it’s existing obligations and determine the appropriate funding structure
• Consider the degree to which the level of indebtedness might affect liquidity and the potential impact on business strategy and ability to finance future growth.

Target Audience

For fixed income professionals, lending bankers, and other finance professionals working in credit risk management and credit products areas, including relationship management and debt origination.

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

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.

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

• Purpose: payback: using the business needs to determine an appropriate debt structure
• Funding alternatives and market access: selecting debt instruments
• Cash-flow forecasts to determine the appropriate structure: type of instruments, amount, currency, maturity, drawdown and repayment profile
• Identifying the repayment source(s) and creating a structure that address the key risks
• Bank lender’s perspective: optimising protection

SCRUTINISING THE APPROPRIATENESS OF THE CAPITAL STRUCTURE

• The cash-flow profile of a business – operating needs versus excess cash available to service debt
• Striking an appropriate balance between business risk and financial risk
• Key considerations in selecting funding instruments (i.e., flexibility, liquidity, maturity, repayment requirements, covenants, pricing, etc.)
• Identifying when liquidity becomes a key structural consideration: seasonal, cyclical, growing, or troubled companies or companies with limited market access (macro, sector or company specific issues)
• Calculating a company’s liquidity requirements
• Evaluating alternative repayment sources (e.g., sale of assets, third party support)
• The impact of market conditions on capital structures, access to credit products and the required degree of structural protection (i.e., covenants, collateral, etc.)

EVALUATING DEBT STRUCTURES AGAINST FUTURE CASH-FLOWS

Debt products – Corporate strategy

• How a company’s financial performance impacts credit ratings, market access and lending terms and conditions
• Identifying the key cash-flow characteristics of different industries/companies (stability and sustainability of funds from operations, working capital and required capital expenditures)
• Leveraged buyouts – what are they and why are they attractive (equity returns versus credit quality)
• When is leverage appropriate? Identifying key characteristics of companies that can manage high levels of indebtedness
• Funding high growth companies: selecting instruments that preserve cash-flow; structures which protect lenders but expose the company to operating risk
• Funding companies with high capex needs: unbundling and isolating future free cash-flow and scrutinising the appropriateness of the funding structure

UNDERSTANDING THE VARIOUS FORMS OF DEBT FINANCING

• The needs of the providers of debt: investor profiles and preferences
• What are lenders looking for and why?
• Refinancing risk: key considerations

Leveraged Loan (Senior Bank Debt)

• Determining when leveraged loans are appropriate
• Key terms and conditions
• Identifying the key lenders and the changes in the markets
• The advantages and disadvantages for the borrower
• The risks and benefits for the lenders
• Secured versus unsecured: when and why?

Second Lien Debt

• Determining when second lien debt is appropriate
• Key terms and conditions
• The advantages and disadvantages for the borrower
• The risks and benefits for the lender
• The risks for other providers of credit, e.g., first lien, trade credit, unsecured creditors, etc.

Bridge Loans

• Determining when bridge loans are appropriate
• Key terms and conditions
• The advantages and disadvantages for the borrower
• The risks and benefits for the lenders

High Yield Bonds

• Determining when high yield bonds are appropriate
• Registered securities, 144A and privately placed debt
• Key terms and conditions
• The advantages and disadvantages for the borrower
• The risks and benefits for lenders / investors

Convertible Bonds and Hybrid Securities

• Determining when convertible bonds are appropriate
• Key terms and conditions
• The advantages and disadvantages for the borrower
• The risks and benefits for the lenders
• The ratings agencies’ view on hybrid securities

Securitization

• The basic structure
• Determining when securitization is an appropriate form of financing
• The advantages and disadvantages for the borrower
• The risks and benefits for the lenders

SENIORITY

• The corporate structure
• Identifying the borrower and the risks associated with its position in the corporate structure
• Legal and structural subordination
• Recognising economic subordination: reviewing the cash-flow profiles of debt and equity instruments
• Establishing and maintaining ranking

ESTABLISHING SAFEGUARDS

• Key purposes of safeguards: protect repayment sources, protect ranking, influence strategy, send early warning signals, determine rights to act and ensure legal enforceability
• Defining the lender and borrower positions and objectives
• What are safeguards (e.g. covenants, conditions precedent, events of default)?
• Maintenance versus incurrence covenants
• Assessing safeguards: balancing client and bank objectives

CASE STUDY

• Qualitative tools and quantitative measures to assess a company’s historical performance and anticipate its future performance
• Identify the key risks for lenders and equity providers
• Recommend financing alternatives that address the commercial needs of the business and the company’s anticipated cash-flow profile.

Workshop Times