Fundamentals of Corporate Credit Analysis

Section 1: Corporate Credit Analysis Training Introduction

• Review of a framework to help delegates learn the key aspects of credit analysis
• Review of the rating agencies’ approach to rating corporates

Section 2: Credit Fundamentals – Analysing the Financial Statements

Section 2.1: How Key Line Items in the Income Statement Impact Credit Analysis

• Revenues – key drivers, risks and growth outlook; the impact of IFRS 15
• The cost base – key drivers, operating leverage and scope for changes
• Capitalisation of costs
• Analysing EBITDA in detail
• Pitfalls of using adjusted EBITDA; avoiding EBITDA add-ons
• Analysing earnings quality
• Gross and net finance expense 
• What to include
• Dealing with capitalised and PIK interest; dealing with accretion expense; dealing with hybrid securities
• Dealing with leases (IFRS 16)
• Dealing with entities accounted for using the equity method – are they a credit positive, neutral or negative?
• Dealing with provisions – charges and write-backs
• Taxation considerations
• Adjustments for NCI
• Case studies: re-organising the income statement, adjusting for non-recurring, non-core and other items and deriving underlying earnings; calculating and analysing key credit ratios: margins (gross, EBITDA, EBIT, pre-tax, net), interest cover, basic and augmented dividend cover

Section 2.2: How Key Line Items in the Statement of Financial Position Impact Credit Analysis

• Non-current assets – tangible
• Valuation basis, life and replacement cycle, asset quality, vulnerability to write-downs, hidden asset value; capex versus depreciation
• Non-current assets – intangible 
• Valuation approach, vulnerability to write-downs, hidden asset value
• Non-current assets – investments in equity-accounted entities
• Non-current assets – financial assets, including derivatives
• Deferred tax assets 
• Why do they arise? Vulnerability to write-down
• Current assets 
• Trade receivables; ageing, the potential for bad debts and provisioning
• Other receivables; what are these? Will they be collected?
• Inventories; potential for obsolescence and write-downs
• Cash and other financial assets
• Restricted cash balances
• Valuation approaches, realisability, vulnerability to write-downs
• The usefulness of non-current and current assets as security
• The relative size of non-current versus current assets and the firm’s capital intensity
• Current liabilities 
• Trade and other payables
• Short-term debt, leases and supplier finance
• Analysing net working capital, including seasonality
• Long term liabilities 
• Provisions, deferred tax, deferred revenues, retirement benefit deficit
• Long-term debt, leases and other financial liabilities
• Off-balance sheet liabilities 
• Vendor funding exposure, recourse financing, contingent liabilities, receivables factoring, recourse non-consolidated funding, guarantees and other
• The equity base and reserves 
• Tangible net worth
• Negative equity
• NCI
• Leverage analysis 
• What constitutes gross and net debt? – Including pension deficits, certain provisions, derivatives, leases and certain off-balance sheet exposures
• Accounting for leases (IFRS 16)
• The impact of hybrid debt
• The debt maturity profile
• Liquidity analysis 
• How can we analyse if the firm will run out of cash?
• The sources and uses of the funds' approach
• What is the reliance on external funding?
• Will undrawn facilities be available?
• Key credit analysis ratios: various leverage ratios, liquidity ratios, current ratios, quick ratios, cash coverage ratios, asset coverage, working capital ratios, (inventory turnover, accounts receivable turnover, accounts payable turnover), intangible assets/equity, ROIC, ROE, asset turnover, Dupont analysis
• Corporate credit analysis training case studies: Analysis of the balance sheets of firms in different sectors; practising balance sheet ratios

Section 2.3: How Key Line Items in the Cash Flow Statement Impact Credit Analysis

• Credit analysis training covers the direct and indirect approach to cash flow
• Deriving operating cash flow
• Reconciling operating cash flow to operating earnings
• Are NWC movements important? Is the NWC seasonal?
• The impact of provisions and deferred tax on cash flow
• Why finance income, finance expense and tax may differ in the cash flow statement from the income statement
• Analysing investment spending 
• Is it sufficient to generate growth?
• Will it yield a return?
• How is it impacted by leases?
• Can the company generate enough cash flow to cover its capital expenditure?
• Analysing financing movements 
• Changes in debt and equity
• Can the cash flow cover any dividends to NCI and shareholders and debt repayments?
• Is the firm undertaking share buybacks?
• Ratio analysis 
• Cash coverage ratios for net finance expense, capital spending and dividends
• Debt service ratios – DSCR, FFO/debt, FFO/net debt, RCF/net debt
• Cash conversion ratios
• Dependence on new funding
• Case studies: Analysis of the cash flow statements of firms in a range of sectors; practising cash flow ratio analysis

Subordination, Structural and Security Factors

• Corporate credit analysis training will cover the different types of subordination
• Structural considerations
• Double leverage
• Security, covenants and guarantees
• How the rating agencies reflect security, structural factors and jurisdictions in their notching
• Ownership considerations
• Case study – assessing the risks in a given group structure

Corporate Credit Analysis Training Conclusion

• Review of a rating scorecard to assess a baseline rating
• Estimating a baseline rating taking into account sovereign, industry, financial ratio and financial policy factors

For the last fifteen years, this corporate credit analysis course trainer has worked as a financial trainer and consultant with major training firms. He covers basic and advanced corporate credit analysis and valuation, distressed debt, financial analysis and financial modelling. Recent assignments have included the European Central Bank, the European Investment Bank, the European Bank for Reconstruction and Development (EBRD), DBS in Singapore, Siemens, Deloitte, HSBC, Carnegie Bank, Gibbs Business School in Johannesburg, Bahrain Institute of Business Finance, Bank of China, BBVA, the African Development Bank, Rand Merchant Bank, Hamburg Central Bank and Mizuho Bank. Delegates have ranged from graduate trainees to board members.

Redcliffe Training’s credit analysis courses are designed by a former Executive Director of CSFB and Lehman Brothers, where she spent seventeen years working as an investment banker in Europe and the US. After graduating from the London School of Economics with a degree in Economics, she joined Kleinwort Benson Ltd as a graduate trainee. She initially worked on analysing, structuring and investing in US LBOs and MBOs and US high-yield debt. Thereafter she worked in Kleinwort Benson’s European corporate finance department, gaining experience in IPOs, mergers, acquisitions, disposals and corporate restructurings, with a particular focus on receivership and bankruptcy situations.

She then moved to CSFB’s fixed income department as the lead European corporate credit analyst, covering new issues and secondary trading and advising clients on their fixed income portfolios. She was head-hunted to go to Lehman Brothers as lead corporate credit analyst. She specialised in high-grade and cross-over telecoms, including new issuance and advising proprietary traders and fund management clients on their investments. Outside of delivering credit analysis courses, she has also worked as an expert witness on financial trials and as an advisor on private equity transactions.

This corporate credit analysis course will help you achieve the following:

• The fundamentals of corporate credit analysis and offer comprehensive guidelines to enable delegates to conduct the credit analysis of a company. We practise analytical techniques that can be applied across a wide range of industries and firms.
• Detailed quantitative risk analysis of a group’s historic and forecast results.
• The income statement analysis will focus on deriving underlying earnings and calculating and interpreting key credit ratios.
• The cash flow statement - we focus on the sustainability and level of cash flows versus the firm’s cash outflows and calculate key cash flow ratios.
• In the balance sheet, we focus on asset valuations, leverage, liquidity, net working capital and capital intensity and calculate key credit ratios.
• Redcliffe Training’s credit analysis courses also review structural, subordination, ownership and security factors.

• Our credit analysis courses ensure you can apply what you learn directly to daily work assignments.
• This bank credit analyst training program is intended to be practical rather than theoretical.
• We use recent financial statements to illustrate key learning points.
• Active participation is encouraged and we reinforce learning points with regular, practical exercises and up-to-date case studies.
• Credit analyst training also highlights the importance of adapting reported figures, including EBITDA and net debt, to establish a more conservative and realistic analysis of the firm’s underlying situation.

Our corporate credit analyst training program provides essential skills and learning points for:

• Bank credit officers
• Investment bankers, particularly those specialising in distressed debt reorganisations
• Debt capital markets specialists
• Bond credit analysts
• Fixed-income credit traders
• Fixed-income credit salespeople
• Fixed-income fund managers
• Treasurers and financial decision-makers in corporations
• Compliance officers
• Management consultants

Corporate credit analysis courses should teach delegates how to assess the credit profile of a firm or group and how it may evolve in the future. Our credit training will do that and a lot more.

We focus on analysing the historic and forecast financials, with a particular focus on deriving underlying earnings, sustainable cash flow, leverage, interest coverage and liquidity. We calculate and analyse key credit ratios to help assess the firm’s relative operating position and financial flexibility.

We also review structural factors (structural subordination, double leverage etc.), ownership characteristics, security and how these can impact the credit risk of a group and particular debt instruments. Delegates are encouraged to analyse the key credit risk parameters and evaluate how they may change in the future, rather than simply describing the historic financials.

As far as corporate credit analysis training courses go, this will not leave you with gaps in knowledge or application.