This intensive 4-day financial training course will focus on:
- The credit process
- Corporate credit rating and key ratios
- Assessing country risk
- Assessing industry risk
- Assessing borrower specific risk
- Assessing accounting risk, the potential for manipulation of financial statements, and the key analytical adjustments mitigating these risks
- Establishing the borrower's debt capacity
- Spotting early warning signs
- Forecasting and sensitivity analysis
- Development of remedial action plans
- Integrated operational and financial restructurings
- Balancing risk and reward
Who should attend?
- Commercial and Corporate Executives
- Banking Managers
- Credit Risk Analysts
- Credit Risk Managers
- Finance Directors wishing to understand how banks approach the credit process
- Advisory firms wishing to update their knowledge on the credit process
Course background
Since 2007, the global banking sector has experienced unprecedented levels of stress. From historic lows in mid-2007, corporate default rates have hit record highs and would have been even higher but for the large number of “covenant-lite” facilities which became too prevalent at the peak of the credit bubble.
Many such facilities are only now beginning to mature, meaning that further stress is likely. With the banking itself facing credit and liquidity constraints, exacerbated by the mooted “Basel III”, the imperatives for bankers are: (i) to be able to identify creditworthy corporates; (ii) to structure risk appropriately (with relevant financial covenants set with appropriate levels of “headroom”); (iii) to obtain sufficient support in terms of collateral, and (iv) to price credits according to their risk. This programme has been designed to guide bankers through this difficult process and to give practical advice on what to do if problems occur.
Day 1
Session 1 - Credit Rating Methodology
- The approach & perspective.
- Qualitative vs. quantitative analysis.
- Interaction between business risk profile and financial risk profiles.
- Key ratings ratios: comparable companies’ analysis.
- Median ratios per rating category.
Case Study: Delegates rate a corporate based upon its financial risk profile.
Session 2 – Industry Risk
- Introducing a framework for categorising industry risk across a range of key factors:
- Seasonality, cyclicality, profitability, dependence, regulatory.
- Methodologies for different industries and holding companies.
- Macro economics & risk grid on macro , country , industry & counterparty.
- Porter’s 5 forces.
Case Study: Delegates work in teams and make group presentations on industry risk in a range of industries.
Session 3 – Country Risk
- Political risk: expropriation, price controls, social unrest, prolonged labour strikes, rapid increases in export tariffs, delayed payments.
- Economic risk: GDP contraction, increases in cost of fund, liquidity constraints, weakening banking system.
- Foreign exchange risk: competitive devaluations, currency mismatch, sovereign restrictions on access to FX, forced conversion into local obligations.
- Sovereign vs. country risks: are ‘sovereign ceilings a reality?
- Focus on South Africa, foreign vs. local currency ratings.
Case Study: Greece – and the similarities with Portugal, Italy, Ireland and Spain.
Session 4 – Company Risk
- Business risk evaluation framework.
- Assessing management: management strategy and performance, corporate governance, financial policy.
Case Study: analysing a cyclical business.
Session 5 – Analysing Inter-Company Relationships
- Group support & constraints / recourse vs. non-recourse debt / inter-company transactions.
- Multinational criteria and assessment of implied support.
- Parental guarantees, guarantee rings, group structures and subordination issues: letters of comfort – how strong/ reliable?
Day 2
Session 1 – Adjusting Financial Statements (i)
When we analyse financial statements, we are subject to accounting risk. We need to develop techniques to identify risks such as creative accounting and to mitigate them by making adjustments to the financial statements presented by our customers to reflect economic reality rather than simply satisfying accounting regulations.
DVD based case studies on six international accounting scandals: Delegates are asked to make group presentations identifying the accounting issue, why the problem has occurred and stating how good credit analysis could prevent their banks from becoming a victim of such schemes.
Session 2 – Adjusting Financial Statements (ii)
Operating leases as debt equivalents: course director leads delegates through the process of “bringing the operating lease onto the balance sheet”, demonstrating the impacts on all financial statements and ratios.
Exercise: delegates adjust the financial statements of a corporate making extensive use of operating leases, commenting upon the impacts on key financial ratios.
Session 3 – Adjusting Financial Statements (iii)
Course director presents upon the need to make other key adjustments:
- Guarantees/other contingent liabilities, derivatives, securitisation of receivables; inventory securitization, take or pay contracts, the impacts of MTM accounting.
Session 4 – Debt Capacity/ Leverage
- Definitions.
- Calculations.
Session 5 – Financial Risk Analysis
- Measuring corporate financial performance.
- ROE.
- ROCE.
- EVA.
- RONOA.
Exercises
Day 3
Sessions 1 and 2 – Forecasting and Sensitivity Analysis
Forecasting in Excel 2003 or 2007.
- Forecasting approach.
- Modeling scenarios/assumptions.
- Interpretation of forecasts.
Case Study: delegates identify the key risks within a business expansion proposal, use scenarios within Excel to conduct sensitivity analysis and work in groups to propose a suite of forward-looking financial covenants appropriate to the situation. This session will incorporate cash flow analysis and the key cash flow/ debt service coverage tests.
Session 3 – Early Warning Signs of Financial Distress
Using key performance indicators (KPIs) as leading indicators of financial performance, showing short case studies to demonstrate which KPIs are relevant to which sectors:
- Retail.
- Cement manufacture.
- Steel manufacture.
- Automotive component manufacture.
- Hotels.
- Corporate Debt Restructuring.
Session 4 – Overview of loan workouts and restructurings
Lessons from experience: restaurant chains, gypsum wallboard plants, transportation, hotels, etc.
Session 5 – Initial Analysis
Use of liquidations/ outcomes models to assess stakeholders’ economic interest and how the pain should be shared. Overview of restructuring/ insolvency priorities to assist with this process.
Case Studies: US conglomerate and European automotive component manufacturer.
Day 4
Session 1 – Restructuring the Balance Sheet of a Distressed LBO Company
Case Study: delegates restructure the company’s balance sheet and propose heads of terms. Debrief includes actual term sheet, detailed rationale and outcome.
Session 2 – Risk and Reward in Workout Cases
- Constructive criticism of the previous case – how to improve.
- Imposing a RAROC structure on workout pricing.
- Reward techniques, including: cash pay/ PIK interest; restructuring/ success/ deferred financing fees; waiver fees; warrants; convertibles structures; debt for debt exchanges and debt for equity swaps.
Distressed Debt and Alternatives
Session 3 – A Distressed Biodiesel Producer: a green facility before its time?
- Identification of causes of financial distress.
- How can the causes be addressed?
- What will it take for the facility to achieve viability?
- Who has the economic interest?
- Use of debt for equity swaps.
- Nuisance power of shareholders.
- How the takeover was structured.
- What should the workout bankers do now.
Session 4 – Multi-Creditor Workouts
- Overview of the London approach and Insol 8 Principles.
- Steering committees.
- Standstill agreements.
Session 5 – Take the Offer or Invest and Hold to Maturity?
- Identification of causes of financial distress.
- Using consultants’ reports.
- What will it take to become viable?
- Economic interest.
- Valuation methods.
- Distressed debt investor’s perspective.
- Framework for considering offers.
Case Study: delegates restructure the company’s balance sheet and propose heads of terms. Debrief includes actual term sheet, detailed rationale and outcome.