Euromoney Audit Training

Course overview

During the financial crisis, many banks and other financial institutions lost billions of dollars due to their failure to analyse credit risks correctly. Even when financial institutions do not suffer direct financial losses due to default or market movements, they may be receiving an inadequate return for the risks involved.
With leveraged instruments set to remain a standard part of corporate capital structures, in both the private and public equity markets, knowing how to analyse credit risk remains key to avoiding losses and to maximise returns.

The aim of 'Credit Analysis and Financial Modelling' is to teach delegates how to model and analyse corporate credit risk, how to assess structural and documentation risk and to give an overview of dealing with NPLs. This course does not extend to the analysis of banks, insurance companies or structured vehicles.

Summary of course content

• Bank loan and bond markets
• Credit ratings and the rating agencies
• Financial analysis, including calculating key credit ratios
• Financial modelling in Excel, including Leveraged Buyouts (LBOs)
• Qualitative risk analysis: sovereign, industry and companyspecific
• Quantitative risk analysis
• Impact of corporate finance activity on credit quality
• Documentation, including the 8 key non-financial covenants
• Default predictors and dealing with problem credits

Methodology

The course combines formal theoretical instruction with frequent use of exercises and case studies. These are based on real situations and are designed to help delegates implement new practices and to learn from empirical experience. Delegates are expected to know how to use Excel at a basic level. The course is practical and inter-active, with delegates encouraged to ask questions. The techniques taught are intended to be of immediate practical use in the workplace. The lecturer will be available throughout the duration of the course to offer additional help if required.

Computer-based exercises

All delegates should bring their laptops to facilitate in-class studies and exercises.

Who should attend this training course?

• Bank credit officers
• Investment bankers
• Management consultants
• Bond credit analysts
• Fixed income/credit traders
• Fixed income/credit sales people
• Fund managers
• Treasurers
• Compliance officers
• Financial decision makers in corporations

Supporting publications:

  

DAY ONE

Types of lending and credit ratings

• The lending markets
• Bank lending and CDS
• The bond markets - high grade and high yield
• Credit ratings
• Rating scales and definitions
• Recovery ratings
• Relevance of sovereign ratings

Financial aspects of credit analysis (quantitative factors)

DAY TWO

Modelling and forecasting in Excel

• Analysis of historic results
• The profit and loss account; adjusting for exceptionals
• The cashflow statement; re-organising the cashflow statement
• Earnings vs. cashflow
• The balance sheet; debt maturity profile
• Off balance sheet liabilities
• Adjustments for operating leases
• The importance of forecasting and of cashflow versus assets
• Ratios for credit analysis (leverage, liquidity, earnings and cash coverage, asset coverage, working capital, asset turnover)
• Payback/debt servicing analysis

Case study: analysis of a listed retailer & listed property company

• Assessing debt capacity
• Accounting factors

DAY THREE

Modelling and forecasting in Excel (continued)

• Creation of full financial forecasting models - simple and more complex
• Creation of assumptions
• Return analysis
• Creation of covenant package
• LBO model

Case studies: modelling with Excel of historic accounts, creation of forecasts, sensitivity analysis within one Excel file, calculation and analysis of ratios, creation of covenants. Creating a refinancing package for a cyclical company.

Business risk analysis (qualitative factors)

• Sovereign
• Economy, currency, credit rating, political risks
• Industry
• Porter's five forces
• Industry life cycle (growth)
• Industry cyclicality (earnings quality)
• Leading indicators
• Competition
• Pricing dynamics; demand vs. supply
• Changing business environments
• Regulation
• Capital intensity and cost base

Case study: review credit of company in changing industry environment

• Company specific
• Management
• Operating, capital and corporate finance strategies
• Competitive advantages and cost position
• Product/service offering, differentiation and pricing power
• Diversification
• Customer/supplier concentration
• Structural factors
• Shareholder structure
• Ownership and support
• Structural and contractual subordination
• Impact of structural issues on ratings

DAY FOUR

Leverage analysis

• The advantages and disadvantages of leverage: debt vs. equity
• Suitability for leverage
• Determinants of leverage
• Impact of shareholder value considerations on credit quality
• Corporate structure and double leverage

Case study: evolution of BAA's risk and financial profile and structure of borrowing

Risk limitation techniques, covenants, documentation, distressed credit situations

• Purpose and structure of debt facilities
• Documentation
• Overview of a loan agreement
• Overview of high grade and high yield bond prospectuses
• Reps and warranties, conditions precedent, negative pledge MAC clauses, events of default, cross-default, equity cures etc
• Focus on covenants - financial and non-financial covenants 
• Covenant definitions (financial), including off-balance sheet liabilities
• Covenant definitions (non-financial) - what makes for stronger or weaker covenants
• The 8 key covenants for event and recapitalisation risks

Pricing for bonds

Pricing for loans

DAY FIVE

Impact of corporate finance transactions on credit quality; leveraged buyouts

• Corporate finance transactions
• Mergers, acquisitions, disposals, break-ups, demergers, LBOs, etc

Case studies: impact of M&A on credit quality

• Leveraged buyouts
• Rationale to LBOs
• Structuring an LBO
• Quick method of assessing LBO returns
• Assessing returns to equity and subordinated lenders
• Modelling an LBO

Distressed credits

• Identifying the problems
• Signs of business deterioration
• Developing a revised business plan - does the firm have a future?
• Assessing recovery rates
• Assessing the options: liquidation or administration/restructuring
• Debt restructuring options
• Renegotiation of terms: PIK, higher interest, extended maturities, additional security, warrants, etc
• Equity injection
• Debt forgiveness
• Debt for equity swap/warrants
• Debt for debt swap
• Discounted debt buybacks
• Sale of entire company

• Sarah Martin

  Sarah Martin has spent seventeen years working as an investment banker in Europe and the US. She has principally worked in the credit markets and has experience of the US and European high grade and high yield markets, the European new issue markets, the Asian convertible bond markets, of corporate restructurings of distressed credits and was the lead analyst on the largest LBO in Europe in 2000 (Tecnost/Telecom Italia). She also has extensive experience of corporate finance transactions, including mergers, disposals, privatisations, IPOs and capital raisings. She was latterly an Executive Director at Lehman Brothers in Fixed Income Research in London, having also worked for CS First Boston and Kleinwort Benson. She now works on an independent basis advising the legal profession and companies on credit analysis and company valuation. She has a degree in economics from the London School of Economics and stock exchange qualifications from London and New York.

  Courses run by this instructor

  • Corporate Valuations - Techniques and Modelling

Interested in holding this course in-house? Please fill out your details and a member of our team will be in touch with more information.

Corporate Loan Workouts and Financial Restructurings

1-3 Nov 2010 (Hong Kong, Hong Kong)

With a freshly updated agenda, upon completion of this innovative 3-day course, you will able to quickly identify what is causing borrowers problems and provide the most appropriate and cost effective financing solution.

Advanced Credit Risk Masterclass

19-22 Oct 2010 (Singapore, Singapore)

'Advanced Credit Risk Masterclass' is designed for bankers, credit and product specialists and other professionals responsible for maintaining top quality loan portfolios, identifying risk management opportunities and designing financial solutions for clients in a new and evolving international credit environment. This means bankers should employ stochastic credit structures and risk management methodology conspicuously absent in days prior to the recent international banking crisis.

Syndicated Loans for Practitioners

27-29 Oct 2010 (Hong Kong, Hong Kong)

'Syndicated Loans for Practitioners' is designed for corporate and sovereign borrowers, bankers specialising in syndicated loans and syndication advisors to help understand how syndications work in practice. As a result the course is not simply theoretical or technical, rather its aim is to equip delegates with the current information and practices directly applicable to their real world syndication activities.

Distressed Debt and Loan Trading - Singapore

4-6 Oct 2010 (Singapore, Singapore)

'Distressed Debt and Loan Trading' will equip professionals with limited experience of distressed debt or who are new to this sector with necessary knowledge to be able to appreciate the terminologies, compliance, legal and practical steps to help maximise returns in workout situations.