Course dates
A 4-day case study based training course covering:
- Financial policy and analysis, including calculating key credit ratios.
- Credit ratings & the rating agencies.
- Financial modeling in Excel, including LBOs.
- Structural factors, guarantees, documentation, covenants.
- Impact of corporate finance activity on credit quality.
- Non-performing loans and debt restructuring – potential options and outcomes.
Course Objectives:
- Credit ratings & the rating agencies.
- Quantitative risk analysis – financial policy and analysis of results.
- Financial modeling in Excel, including LBOs.
- How to apply sensitivity analysis.
- Impact of corporate finance activity on credit quality.
- Structural & contractual subordination.
- Guarantees, documentation: high grade & high yield prospectuses, loan document.
- NPLs, options for and valuation of distressed companies.
Who Should Attend:
- Bank credit officers.
- Investment bankers.
- Management consultants.
- Bond credit analysts.
- Fixed income/credit traders.
- Fixed income/credit salespeople.
- Equity analysts/investors.
- Fund managers.
- Treasurers.
- Compliance officers.
- Financial decision makers in corporations.
Teaching Methodology:
The teaching methodology used on this 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 intended to be practical and inter-active, with delegates encouraged to ask questions. The techniques taught to delegates 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.
Course Background:
During the recent severe financial crisis, many banks and other financial institutions have 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/market movements, they may be receiving an inadequate return for the risks involved. With leveraged instruments set to remain a key 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 maximizing returns. The aim of this course 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.
Day 1
Ratings, financial policy, results analysis
Credit ratings
- Background to the rating agencies.
- Overview of rating scales and definitions.
- Investment grade vs. non-investment grade.
- Short term and long term ratings.
- Reviews and outlooks.
- Relevance of sovereign ratings.
- Default probabilities and recovery rates.
- Limitations of the rating agencies.
Financial policy
- Debt vs. equity.
- Low leverage vs. high leverage.
- Suitability for leverage.
- Assessing debt capacity.
- Impact of shareholder value policies on credit profile.
Results analysis
- The profit & loss account; limitations of EBITDA.
- The cashflow statement; focus on operating cashflow.
- Earnings versus cashflow; re-organising the cashflow statement.
- The balance sheet, debt maturity profile.
- Off balance sheet liabilities.
- Adjustments for operating leases.
- Ratio analysis (Leverage, liquidity, earnings & cash coverage, asset coverage, working capital, asset turnover).
- Ratios vs. peers & the industry.
Case studies: Credit analysis of a retailer and property company.
Day 2
Modelling in Excel, including LBOs
- Creation of full financial forecasting model.
- Analysis of historic track record.
- Analysis of trends/ratios.
- Preparation of financial forecasts.
- Creation of assumptions.
- Return analysis.
- Sensitivity analysis vs. a base case.
- Impact of change in capital structure.
- Managing working capital & capex.
- Modelling access to new debt and equity funding.
- Modelling a LBO.
- Modelling reduced funding availability.
- Creation of covenant package.
Case studies: Modelling with Excel of historic accounts, creation of forecasts, sensitivity analysis, calculation and analysis of ratios, creation of covenants. Creating a refinancing package.
Day 3
Impact of corporate finance activity on credit quality; structural factors, guarantees, security, documentation
Impact of corporate finance transactions on credit quality
- Mergers, acquisitions, disposals, break-ups, demergers, LBOs etc.
Case studies: Impact of M&A on credit quality.
Organisational and ownership characteristics
- Structural factors.
- Different types of shareholder structure – impact on credit analysis & documentation.
- Ownership & support.
- Structural subordination & lending to the correct group entity.
- Upstream and downstream guarantees.
- Contractual subordination.
- Impact of structural issues & ownership on ratings.
- Impact of shareholder value policies on credit profile.
- Double leverage.
Security considerations
- Focus on valuing the assets of energy companies – existing asset bases, proven & probable reserves, etc.
- Main ways to take security.
- Perfection & enforcement.
- Reconciling the aims of different creditors with those of the borrower.
- Lender hierarchy – payment of interest and principal.
- Lender hierarchy – in the event of restructuring or liquidation.
Documentation
- Overview of a loan agreement.
- Overview of high grade & high yield bond prospectuses reps & warranties, conditions precedent, negative pledge (including hedging), MAC clauses, covenants (see below), market disruption, market flex, events of default, crossdefault, consents, waivers, amendments, yank the bank, confidentiality, withholding tax issues, equity cures.
- Security – limits on enforceability & release provisions.
- Reporting & disclosure.
Subordination and inter-creditor agreements
- Main standard terms, drag along rights, waterfall of funds, standstill periods, right to participate in restructuring discussions.
Focus on covenants – financial & 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 & recapitalisation risks.
- Guarantees & letters of comfort.
- Escrow accounts.
- Cashflow ringfencing
Day 4
NPLS and debt restructuring
Background
- What is distressed debt?
- Historic and forecast default rates by country/market/sector.
- Default rates vs. recessions and sovereign crises.
- Recovery rates by country/market/sector.
- Big companies vs. small companies.
- Bilateral loans vs. syndicated loans.
Why is the company distressed?
- Sovereign, recession, industry change, poor management, fraud, over-levered, etc, etc.
- Is the company worth trying to save?
- Short term problems vs. long term outlook.
Is the company worth saving?
- Turnaround plans & potential management changes.
- Pricing, volumes, currency, cost cutting, asset sales, downsizing, working capital, capex.
- Asset write-downs.
- Other liabilities – pensions, provisions, contingencies, deferred tax, etc.
- Qualification of accounts.
- Ratings considerations.
Background to the debt restructuring
- Lenders’ considerations.
- Does the company need additional funding?
- Ranking of claims on assets, cashflows & residual firm value.
- Structural subordination issues.
- Preferential claims.
- Political interference.
Potential options & outcomes
- Liquidation or administration/restructuring.
- 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.
- What happens when lenders cannot agree on a solution?
Sale of the whole company/forecast firm value
- DCF` valuations.
- Comparing future value with current claims.
- Forecast residual value vs. short term liquidity constraints.
Course summary and close
Johannesburg Hotel, Johannesburg, South Africa
This programme takes place on a non-residential basis at a central Johannesburg hotel. 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.
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