Fundamentals of Corporate Credit Analysis

Learn how to analyse corporate credit risk and how to assess an appropriate return, including qualitative, quantitative, and structural factors.

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A 1.5 day corporate credit analysis course

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Download: Course Outline

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, accretion expense and 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
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
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, and retirement benefit deficit
- Long-term debt, leases and other financial liabilities
Off-balance sheet liabilities:
- Contingent liabilities, receivables factoring
The equity base and reserves:
- Tangible net worth
- Negative equity
- NCI
Leverage analysis:
- What constitutes gross and net debt? This section includes pension deficits, certain provisions, derivatives, leases and certain off-balance sheet exposures
- Accounting for leases (IFRS 16)
- 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

The direct and indirect approach to cash flow
Deriving operating cash flow
Reconciling operating cash flow to operating earnings
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 do leases impact it?
- 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 & Security Factors

This corporate credit analysis course assesses 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

Understanding Credit Ratings

Different types of rating
How the rating agencies determine a corporate rating
Review of a rating scorecard and assess a baseline rating
Estimating a baseline rating taking into account sovereign, industry, financial ratio and financial policy factors

For the last fifteen years, our corporate credit analysis course leader has worked as a financial trainer and consultant with major training firms. She 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 and more

Delegates have ranged from graduate trainees to board members.

She is a former Executive Director of CSFB and Lehman Brothers. She spent seventeen years working as an investment banker in Europe and the US. After graduating with an Economics degree from the London School of Economics, she joined Kleinwort Benson Ltd as a graduate trainee. She 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. Here she gained experience in IPOs, mergers, acquisitions, disposals and corporate restructurings. The latter 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. She covered new issues, secondary trading and advising clients on their fixed income portfolios.

She was head-hunted for Lehman Brothers as a lead corporate credit analyst. She specialised in high-grade and cross-over telecoms, new issuance and advising proprietary traders and fund management clients on their investments.

Outside of delivering commercial credit analysis training, she was an expert witness on financial trials and an advisor on private equity transactions.

This corporate credit analysis course will help you:

Understand the fundamentals of corporate credit analysis. Comprehensive guidelines will enable you to conduct the credit analysis of a company.
Practise analytical techniques applied across a wide range of industries and firms.
Detailed quantitative risk analysis of a group’s historic and forecast results.
Analyse income statements with a focus on deriving underlying earnings and calculating and interpreting key credit ratios.
The cash flow statement and the sustainability and level of cash flows versus the firm’s cash outflows, including calculating 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.
Review structural, subordination, ownership and security factors.

Fundamentals of Corporate Credit Analysis ensures you can apply what you learn to your daily work assignments.
This commercial banking credit analyst training program intends to be practical rather than theoretical.
We use recent financial statements to illustrate key learning points.
We encourage active participation, and we reinforce learning points with regular, practical exercises and up-to-date case studies.
This corporate credit analysis training highlights the importance of adapting reported figures. This includes EBITDA and net debt to establish a more conservative and realistic analysis of the firm’s underlying situation.

Fundamentals of Corporate Credit Analysis 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 and financial institutions
Compliance officers
Management consultants

Redcliffe Training's corporate banking credit analysis sessions show delegates how to assess the credit profile of a firm or group and how it may evolve in the future.

We focus on analysing the historic and forecast financials, with a focus on deriving underlying earnings, sustainable cash flow, leverage, interest coverage and liquidity. Learn to 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 will analyse the key credit risk parameters and evaluate how they may change in the future, rather than only describing the historical financials.

This corporate credit analysis course and its material will not leave you with gaps in knowledge or application.

I found this course extremely interesting and I am certain that I will incorporate some of the concepts we learned into my work as a specialist in corporate banking. I collaborate closely with credit and business managers when analysing companies for potential loan approvals. This new knowledge will undoubtedly enhance our decision-making process. What intrigued me the most was the instructor's explanation of how she analyses and adjusts EBITDA. I also liked the real-world examples and case studies.
It will help me in the future to spot items in the company's financial statements that could misrepresent the company's financial position.

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