Course dates
A 5-day training course with extensive case studies covering:
• 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) such as debt service coverage
• Qualitative risk analysis: sovereign, industry and company specific
• Quantitative risk analysis
• Impact of corporate finance activity on credit quality
• Documentation, including the eight key non-financial covenants
• Default predictors and dealing with problem credits
Course background
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.
This course teaches 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.
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 laptops to facilitate in-class studies and exercises.
Day 1
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)
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
Day 2
Analysis of historic results (continued)
Off balance sheet liabilities
Adjustments for operating leases
The importance of forecasting and of cashflow vs. 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 and listed property company
Assessing debt capacity
Accounting factors
Day 3
Modelling and forecasting in Excel
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 4
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 eight key covenants for event and recapitalisation risks
Pricing for bonds
Pricing for loans
Day 5
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
Centrally located hotel in Paris, Paris, France
This programme takes place on a non-residential basis at a hotel in central Paris. Non-residential course fees include training facilities, documentation, lunches and refreshments for the duration of the programme. Delegates are responsible for arranging their own accommodation, however, a list of convenient hotels (many at specially negotiated rates) is available upon registration.
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Sarah Martin
Former Executive Director of CSFB and Lehman Brothers
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 and of corporate restructurings of distressed credits. She specialised in the telecoms sector and was closely involved in the structuring, raising and/or trading of bank and public debt for telecoms companies in many countries, including Europe, South Africa, Asia and Latin America. She also has extensive experience of corporate finance transactions, including mergers, disposals, privatisations, IPOs and capital raisings. Until 2003, she was 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 and private equity professions 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
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Course dates