- Extend credit analysis to crucial corporate finance issues
- Apply analytical tools to better understand changes in economic, industry and company conditions
- Calculate and assess expected default, loss given default, loan loss provision and loan capital allocation.
- Adjust divisional systematic risk estimates to reflect differences in capital structure
- Learn to frame and articulate valuation appraisal reports
- Understand the underlining meaning behind financial statements including consolidated statements
- Summarise key risk factors leading to credit decisions/ recommendation
- Help clients bring to life optimal business plans
- Identify warning signs for stressed obligors
- Work with SWOT concepts
- Understand corporate strategy and the mission of the business
- Realise the regulatory framework of Basel III.
- Estimate pricing of transactions and return on risk adjusted capital (RAROC)
- Work with risk rating systems including corporate and specialised lending projects
Course background
The banking industry is emerging from the most difficult credit cycle since the Great Depression. The most recent rise of European CDS spreads had an impact in many countries, underlining investors’ heightened concerns about widespread sovereign and financial institution risk. Both debt and equity markets are calling upon risk managers to make a concerted effort to return to basics - refine tools and techniques they use to underwrite loans and reinforce disciples including strategic planning, SWOT analysis, governance structures, corporate valuation appraisals, gearing structures, cash flow and reporting standards. Today, enhancing one’s credit and financial analysis skills has never been more important, yet institutions are challenged to provide wide-ranging “back to basics” training in a cost-effective, efficient way.
Who should attend?
The course will be of value to professionals in the following areas:
- Corporate lending officers
- Credit analysts and managers
- Valuation specialists
- Bank regulators
- Bank consultants
- Treasury managers
- Risk analysts
- Investment bankers
- Research and ratings
- Human resources
- Accountants
- Bank internal auditors
- Loan portfolio managers
Program methodology
This program is interactive and encourages participation. Hands-on exercises, deal analysis, examples and case studies reinforce concepts and help deliver solutions. Participants will use laptops during the workshop. There will be significant pre course readings, preparation and computer exercises. Laptops should have recent versions of Microsoft Word, Microsoft PowerPoint, and Microsoft Excel. Case studies integrate the knowledge you acquired and deal with real life companies as well as the use of industry analysis modules. We deliberate cases in groups and present to the class.
Day 1
Module 1
Bankers Guide to Understanding the Industry
Identify and minimise the risks that face businesses both within a particular industry and from a business and management risk perspective
• The need for industry internal auditing standards
• Identification of loans by industry
• Analysis of industry fundaments
• Reporting industry concentrations
• Quantifying industry risk
• Incorporating industry analysis into the loan portfolio
• How industry knowledge helps loan interviews
Case Study: Printing Industry: Developing comprehensive/professional industry analysis
Module 2
Sovereign Risk
We analyse and quantify sovereign risk as a key determinate of corporate default and yield spreads. Country risk relates to the likelihood that changes in the business environment will occur that reduce the profitability of doing business in a country. These changes can adversely affect an obligor’s operating profits as well as asset values.
• Interagency Country Exposure Review Committee (ICERC) rating
• A country's resource base in terms of natural resources, human resources and financial resources
• Outlook for domestic political stability
• Quality of economic and financial management
• Country's long-run development strategy
• How economic growth is financed: (1) largely by domestic revenues and savings; (2) through foreign speculative investments
• Inflation control
• Wage and price policies in line with productivity growth
Module 3
Corporate Strategy and the Mission of the Business Part One: The life-cycle approach to strategic planning
The mission of a business is a statement of the way to attain competitive leadership. Corporate managers need to improve operational efficiency at all functional levels: marketing, management, operational and financial. Basic to this objective is a clear understanding of financial statements and financial reporting concepts that respond to past management policy and future corporate strategic planning.
• Understanding the mission of the business
• Formulation of business strategy and broad action programs
• Consolidation of business and functional strategies
• Balancing the business portfolio of the firm
• Defining a strategy for divestment decisions
• Introduction to shareholder value
• Identifying the stage of a business within the life cycle
• Leverage, growth and valuation
Module 4
Corporate Strategy and the Mission of the Business Part Two: SWOT analysis
SWOT analysis is a strategic planning method used to evaluate the Strengths, Weaknesses, Opportunities, and Threats involved in a project or in a business venture. It involves specifying the objective of the business venture or project and identifying the internal and external factors that are favorable and unfavorable to achieve that objective.
• Porter's generic strategies: competitive advantage; differentiation
• Strengths: characteristics of the business or team that give it an advantage over others in the industry
• Weaknesses: are characteristics that place the firm at a disadvantage relative to others
• Opportunities: external chances to make greater sales or profits in the environment
• Threats: external elements in the environment that could cause trouble for the business
Day 2
Module 5
Asset Management, Risk and Portfolio
• Capital budgeting and project analysis
• Corporate ratio analysis
• Determining discount rates for projects
• Introduction to the cost of capital
• The corporation as “portfolio”
• Introduction to systematic and unsystematic risk
• Constructing divisional betas: expected returns vs. required returns
• The securities markets line and corporate stretegic decision making
• Cost volume profit analysis, break even, operating leverage
Module 6
Financial Statement and Evaluating the Financial Health of a Business
Often creative accounting defies reality, to the lender's discredit. Lenders need to separate fact from fiction by truly grasping financials. This means scrutinising annual report footnotes and asking sharp questions. Lenders must be able to identify key differences between "reported" balance sheet and intrinsic' "market value", and most importantly, how changes in financial statements act as storm signals, which, when recognised early by the lender can turn their company around.
• Distortion of financial statements established by accountants not "marking to market" poor quality accounts receivable
• General loss and contingencies involving financial statements
• Reading footnotes properly
• International accounting standards regarding segment breakdown
• Distortions possible with investment accounting and taxes
• Evaluation of discretionary items
• Issues dealing with pension accounting: "let the reader beware"
• Corporate consolidated reports: how to grasp the real meaning
Module 7
Assessing Business Risk and Financial Risk of a Corproate
We examine developments in credit analysis that fosters credit culture by helping banks better manage their portfolios, assist with acquisitions to ensure they are accomplished smoothly, and establish a common approach to profitable delivery of credit to the marketplace. Lenders who survive and prosper today will most likely be those who get assistance from sophisticated credit tools designed to help price loans and manage risk effectively.
• Key risk factors leading into decisions or recommendation
• The Prism credit model
• Structure, price, monitor and manage loans
• On the information provided, determine the timing for disbursing funds and establish a repayment arrangement
• Business operations and bank relationship
• Loan purpose and repayment
• Protecting the loan: setting up a matrix system
• Understand importance of covenants
• Monitor and manage loans and build upon client relationships
Case Study: Crochet Candy Corp. (NOTE: This case will be distributed to delegates as pre-course reading and preparation in outline form as the basis for discussion) The bank has been approached by Crochet Candy Corporation to provide a $500,000 increase to $2,000,000 in the existing unsecured line of credit. In light of attractive compensating balances and a relationship dating from 1968, the company has requested prime rate pricing. Delegates review fiscal audited statements and make a credit decision reinforcing the PRISM Credit Model.
Day 3
Module 8
The Analysis of the Obligor’s Cashflow
Cash flow raises questions dealing with ways firms generate and absorb cash, with unresolved, serious issues forming the basis of a discussion with management.
• Developing a cash flow statement
• Check lists that insure reliability of a cash flow analysis
• Cash flow analysis of projects and joint ventures
• The art of merging cash flow and ratio analysis
• How to spot “funny money” in the cash flow statement
• How cash flow is the “jumping off point” to projections
Harvard Case Study: Three Cash Flow Analysis Delegates evaluate three cash flows and make presentations
Case analysis: Gem Furniture Corporation Delegates construct a comprehensive cash flow from scratch and evaluate a $2 million facility submitted Gem, a new client. Gem Furniture Corporation runs a furniture-making empire, ranked as one of the top US makers of residential furniture. If you approve this loan, the firm will transfer $35 million worth of business to YOUR BANK.
Module 9
How Financial Statements Develop into Projections
Financial forecasting cannot predict the future perfectly; they evaluate how obligors will perform under a variety of situations. Thus, projections forecasting is a key credit decision-making tool.
• Overview financial projections
• Statistical tools in today’s computer environment that create high quality projections
• Sensitivity analysis versus simulations
• Adjusting critical assumptions and value drivers
• How to write up and/or present effective projection analysis
Module 10
Sustainable Growth Model
Prudent Lending to High Leveraged Growing Companies
Growth is important to financial health, but it can be too rapid for an obligor’s own good. Too rapid sales expansion can put excessive pressure on a firm’s financial structure. In addition, the more accelerated the growth rate, the greater the requirement for funds to support growth—particularly if the growth is exponential and the borrower is saddled with high operating leverage.
• Prudent lending to thinly capitalised firms
• Using the model to analyse IPO underwriting
• Stabilising growth via profit pruning
• How to set leverage tolerance levels
• Sales growth and financial leverage:
• Finding an equilibrium point lenders find conformable
Day 4
Module 11
How to Develop Interactive (Local Environment) Industry Specific Credit Rating Grids for Borrower / Facilities
• S&P assessment 20-year average of three-year cumulative default rate
• Determination reserve for specialised loan write-off
• Loss Given Default
• Project finance, commodity finance, object finance, income producing real estate
• Risk rating and loan portfolio Optimisation
• Ratings grids and loss given default
• Standards and guidelines: Basel III and regulatory issues
• Evaluation collateral and guarantees
• Transfer and portfolio risk
Case Study: Petroleum Development Corporation: (1) Risk Rating Of This Energy Loan; (2) Evaluating the credit’s put and call pricing structure yielding 30% minimum facility IRR. Delegates review the decision making process of this proposal.
Module 12
Framework for Developing an In-depth Computerised Pricing Model
• Class discussion: how banks price loans
• Incorporating computerised risk rating systems into the pricing matrix to determine hurdle ROE, ROA and RAROC (the loan area requires)
• Risk-adjusted performance measurement
• Loan servicing and activity cost
• Loan pricing sensitivities: funding costs, increase loan loss expense, capital reserve requirement, spreads over base rate.
• The “fee-in-lieu-of-balances” calculation
Module 13
Advanced Topic
Structuring AAA Portfolio Credit Linked Note Hedge
• Rationale of Money Center Bank referenced “Portfolio Credit Linked Note”
• Credit evaluation and expected default probabilities
• S&P’s CDO Evaluator model
• Review of portfolio statistics: correlations, correlation coefficients
• Portfolio recovery values
• Threshold amount and stressing the portfolio threshold
Module 14
Advanced Topic
Determining Shareholder Value: Traditional and New Approaches
The module provides delegates with the financial tools and methodology to determine the value of a company. Bankers utilise valuation techniques/concepts to validate projections used in loan proposals, identify leveraged buyout and restructuring opportunities, analyse the market value of the borrower’s capital structure, and find values in partnership buy-outs.
• Valuation approaches
• Identify the key value drivers
• Determine the valuation weighted average cost of capital
• Select the projection horizon and residual period
• Use simulation to lock in precise cost of capital and free cash flow outcomes
• Develop a cash flow valuation worksheet and learn to write up a valuation appraisal
• Learn how “Pure play” is used to determine cost of capital for a division, project, or private company
• Adjust estimates of divisional systematic risk to reflect differences in capital structure
Case study ABC Corporation. Development valuation analysis and comprehensive valuation report