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Fundamentals of Corporate Credit Analysis

Analyse corporate credit risk and how to assess an appropriate return

Fundamentals of Corporate Credit Analysis Training Course

A two-day course

  • The course is intended to be practical rather than theoretical, in order to help delegates apply what they learn directly to their daily work assignments
  • 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
  • The course 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

  • This credit course introduces delegates to the fundamentals of corporate credit analysis. We practice analytical techniques that can be applied across a wide range of industries and firms
  • We focus on detailed quantitative risk analysis of a group’s historic and forecast results
  • In the income statement analysis, we focus on deriving underlying earnings and calculating and interpreting key credit ratios
  • In the cashflow statement, we focus on the sustainability and level of cashflows versus the firm’s cash outflows and calculate key cashflow ratios
  • In the balance sheet, we focus on asset valuations, leverage, liquidity, net working capital and capital intensity and calculate key credit ratios
  • We review structural, subordination, ownership and security factors
  • We review qualitative factors, including sovereign, industry and firm specific and how these impact the borrower’s actual or implied rating

Day One

Webinar One

Section 1: Introduction

  • Review of a framework for credit analysis
  • Review of the rating agencies’ approach to rating corporates
  • Overview of recent credit trends and default rates
  • Key credit themes for 2022

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 analsying key credti ratios: margins (gross, EBITDA, EBIT, pre-tax, net), interest cover, basic and augmented dividend cover

Webinar Two

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, 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
  • Usefulness of non-current and current assets as security
  • 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 approach
    • What is the reliance on external funding?
    • Will undrawn facilities be available?
  • Ratio analysis: various leverage ratios, liquidity ratios, current ratio, quick ratio, cash ratio, asset coverage, working capital ratios (inventory turnover, accounts receivable turnover, accounts payable turnover), intangible assets/equity, ROIC, ROE, asset turnover, Dupont analysis
  • Case studies: Analysis of the balance sheets of firms in different sectors; practising balance sheet ratios

Day Two

Webinar Three

Section 2.3: How key line items in the cash flow statement impact credit analysis

  • The direct and in-direct approach to cashflow
  • Deriving operating cashflow
  • Reconciling operating cashflow to operating earnings
  • Are NWC movements important? Is the NWC seasonal?
  • The impact of provisions and deferred tax on cashflow
  • Why finance income, finance expense and tax may differ in the cashflow 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 firm generate sufficient cashflow to pay for its capex?
  • Analysing financing movements
    • Changes in debt and equity
    • Can the cashflow cover any dividends to NCI and shareholders and also any 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

Webinar Four

Subordination, structural and security factors

  • 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

Qualitative factors

  • Sovereign factors and the sovereign ceiling
    • Are sovereign ratings a good leading indicator?
  • Macro-economic factors
    • Exchange rates, borrowing costs, cost inflation, supply chain issues, sectoral decline, and counterparty risks
  • Industry/sector factors
    • Industry growth, consumer trends and competitive outlook
    • Impact of ESG, new technology and the internet
    • Competitive dynamics and new entrants
    • Input and output pricing trends
    • Regulation and tariffs
  • Company specific factors
    • Financial factors – covered in Webinars 1-3
    • Non-financial factors - management, M&A strategy, investment strategy, funding and hedging strategies, competitive responses, differentiation, diversification, vertical integration, response to changing consumer preferences

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 twelve years, the trainer has worked as a financial trainer and consultant with major training firms, covering basic and advanced corporate credit analysis and valuation, distressed debt and financial modelling. Recent assignments have included the European Central Bank, the European Investment Bank, the European Bank for Reconstruction and Development (EBRD), Gibbs Business School in Johannesburg, Bahrain Institute of Business Finance, Bank of China, BBVA, the African Development Bank, Siemens, Rand Merchant Bank, Hamburg Central Bank, Guarantco and Mizuho Bank.

A former Executive Director of CSFB and Lehman Brothers, the trainer spent seventeen years working as an investment banker in Europe and the US.  After graduating from the London School of Economics, she joined Kleinwort Benson Ltd as a graduate trainee. She worked initially on analysing, structuring and investing in US LBOs and MBOs and also US high yield debt. Thereafter she worked in Kleinwort Benson’s European corporate finance department, gaining experience of IPOs, mergers, acquisitions, disposals and corporate restructurings, with 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 then 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. She has also worked as an expert witness on financial trials and as an advisor on private equity transactions.

The aim of this course is to teach delegates how to assess the credit profile of a firm or group and how it may evolve in future. We focus on analysing the historic and forecast financials, with particular focus on deriving underlying earnings, sustainable cashflow, 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 study the group’s macro environment and industry risk profile and also the group’s specific operating characteristics. We also review structural factors (structural subordination, double leverage etc), ownership characteristics and security and how these can impact the credit risk of a group and of particular debt instruments.  Delegates are encouraged to analyse the key credit risk parameters and evaluate how they may change in future, rather than simply describing the historic financials.

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