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Advanced Corporate Credit Risk Analysis for Large Corporates

An advanced course for credit professionals on forensic accounting, debt structuring, and distressed credit analysis.

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A 2.5 Day Course

pdf Download:   Course Outline

Section 1: Forensic accounting - learn how to spot red flags of creative accounting and fraud

1.1 Background

  • Differentiating between accounting fraud, aggressive accounting and incompetent accounting
  • What is the purpose of the fraud or aggressive accounting?
  • Forensic accounting analysis by external analysts versus fraud detection by auditors

 1.2 Red flags in the income statement

  • Revenue recognition issues
  • Repurchase agreements
  • Deferred revenues
  • Analysing reported EBITDA
  • Moving EBITDA losses off balance sheet
  • Expense manipulation
  • Accounting choices and estimates (depreciation, reserves, provisions)
  • Capitalisation of operating and interest expenses
  • “Other operating income”
  • Financial expense of certain hybrid instruments
  • Related party transactions
  • The statement of other comprehensive income

 1.3 Red flags in the balance sheet

  • Overstated tangible and intangible assets and impairment avoidance
  • Developments in net working capital
  • Service contracts versus IFRS 16 leases
  • Off balance sheet leases and other off balance sheet liabilities
  • Related-party transactions
  • Goodwill versus debt
  • “Other creditors”
  • Provision liabilities
  • Hybrid securities
  • Cash balances versus capital raisings
  • Discontinued items - liabilities

1.4 Red flags in the cashflow statement

  • Manipulation of operating cashflow
  • Adjustments for capitalised expenses and interest
  • Understatement of capital spending
  • Movements in liquid assets with a maturity of over 12 months
  • Related-party transactions
  • Dividend leakage to NCIs

1.5 Other red flags

  • Trend and peer benchmarking
  • Unusual business combinations and scope of consolidation
  • Management incentives and earnings smoothing
  • Auditor relationships and restatement history
  • Key Audit Matters & going concern statements
  • IFRS and US GAAP versus local GAAP
  • Materiality
  • Ownership status and place of listing
  • Management background checks
  • Corporate governance warning signs
  • 10-Ks, 10-Qs, earnings calls: what to focus on
  • Use of whistle-blower reports, Glassdoor, LinkedIn, MuddyWaters; and other soft indicators
  • Can AI help accountants, management and auditors detect fraud?
  • Can AI help external analysts detect fraud?
  • Case studies include: First Brands, Wirecard, Carillion, Luckin Coffee, Evergrande, Casino, Thomas Cook, NMC Health, Solutions 30


Section 2: Complex group structures

2.1 Complex group structures

  • Defining complex group structures
  • Structural subordination and double leverage
  • The credit and rating impacts of partial ownership, a high level of NCI, and off-balance sheet entities
  • Proportional debt, earnings and cash flow of entities that are not wholly-owned
  • Who owns/controls the debt, assets, earnings, cashflows?
  • The impacts of different consolidation methods and how to make adjustments
  • The credit and rating impacts of different types of subordination
  • The credit and rating impacts of security packages
  • Case studies: reviews of complex group structures; assessing the rating notching implications of different group structures


Section 3: Debt structuring and hybrid securities

 3.1 Financial objectives and achieving an optimal capital structure

  • What are the firm’s financial objectives?
  • Are they realistic?
  • Defining an optimal capital structure
  • Reviewing the advantages and disadvantages of equity and debt
  • Defining enterprise value and equity value
  • Overview of WACC
  • The cost of debt, equity and hybrid instruments
  • Adjusting WACC for multi-national groups
  • Factoring in sovereign risk to the cost of debt and equity
  • Case studies: Calculating EV and equity values; practicing ke and WACC calculations

 3.2 Debt capacity and debt tranches

  • What is the firm’s debt capacity?
  • Theoretical debt capacity versus market reality and constraints
  • Sources of debt service and repayment
  • Capital layering – using mezzanine and subordinated debt
  • Factoring in HC debt and double leverage
  • Who should be the borrower – HC, OpCo, or other?
  • Using off-balance vehicles and products
  • Assessing repayment capacity for amortising debt
  • How will new financing change the firm’s capital structure, WACC, eps, and credit ratings?
  • Case studies: Using a financial forecasting model to change the firm’s capital structure and assess the impacts on credit ratios. Undertaking scenario analysis to stress test the cashflow forecasts

 3.3 Hybrids instruments

  • Convertible bonds, mandatory convertible bonds, exchangeable bonds
  • How much equity credit should be given?
  • IFRS approach
  • The rating agencies’ approaches
  • How to adjust leverage and interest cover ratios for hybrids
  • Case study: estimating how much equity credit to assign to hybrids

 
Section 4: Analysing distressed firms

4.1 Early warning signs of distress

  • Overview of recent trends in downgrades, defaults, and distress rates
  • Background and definitions
  • Causes of distress and common early warning signs
  • Macro and sector signals; event risks
  • Analysing the financial statements and notes of distressed corporates
  • Income statement and operational signs
  • Cashflow signs - prospective and actual liquidity
  • Balance sheet signs
  • Case studies: spotting early warning signs and analysing distressed credits

4.2 What to do in the event of distress and potential restructuring solutions

  • Is it a liquidity problem, a leverage problem or a viability problem?
  • Speculative grade liquidity ratings
  • Acting on early warning signs if there is no covenant breach
  • Amendments and waivers
  • Advantages and disadvantages of calling an event of default
  • Options for restructuring and recovery
  • Does the firm have any residual equity value?
  • Could it have a positive equity value in the future?
  • Is it worth saving? Should the lenders advance additional funding?
  • Operational restructurings
  • Restructuring the borrowing base without debt write-offs
  • DIP funding and the use of the super-senior RCF
  • PIK and extended maturities; cashflow sweeps
  • Equity issuance, shareholder loans and equity cures
  • Restructuring the borrowing base with debt write-offs
  • Debt for equity swaps, debt for debt swaps, debt forgiveness, discounted debt buybacks
  • PIK, PIYC
  • Modelling debt restructuring options for distressed firms
  • Review of models for PD and LGD from Moody’s, KMV, and CreditMetrics
  • Case studies: modelling new borrowing facilities and debt restructuring solutions for distressed firms

Redcliffe's course trainer has worked as a financial trainer for over ten years for many major financial institutions in Europe, Asia, the Middle East and Africa. She trains in financial and credit analysis, company valuation, financial modelling and distressed debt. The delegate profile ranges from graduates to board members. She has a degree in economics from the London School of Economics and stock exchange qualifications from London and New York.

Prior to her career in financial training, she spent seventeen years working as an investment banker in Europe and the US. She started her career as a graduate trainee at Kleinwort Benson and later became an Executive Director of CSFB and Lehman Brothers. 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. She has also worked as an expertise witness in financial lawsuits. She continues to advise SMEs on debt and equity raisings and M&A.

The course aims to:

  • Teach delegates how to spot red flags, both financial and non-financial, in groups that are engaging in aggressive/creative accounting or fraud
  • Help delegates understand how complex group and capital structures impact a group’s credit profile and the implications for rating notching
  • Help delegates understand the main considerations for establishing parent/subsidiary/affiliate ratings (this section will be covered if there is enough time)
  • iItroduce delegates to hybrid capital and how to apply equity credit
  • Help delegates understand how to advise corporate clients on more complex debt structures, in the context of creating an optimal capital structure
  • Examine ways of assessing debt capacity
  • Teach delegates how to analyse the statements of distressed firms and how to spot early warning signs

During the course, we reference and analyse a range of up-to-date case studies across different jurisdictions and sectors.

The 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. The course is practical and interactive, with delegates encouraged to ask questions. The techniques taught 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. All delegates must bring their laptops to facilitate in-class studies and exercises.

This advanced programme is designed for bank credit professionals who analyse and approve large corporate counterparties and transactions. It is suitable for Credit Officers, Credit Analysts, Relationship/Origination Managers, and Portfolio/Workout specialists with 3+ years of experience. Typical seniority: Associate, Associate Director, Vice President, and Director.

As the economic outlook continues to remain difficult in Europe and the US, many corporates are facing a range of challenges, including higher interest rates and leverage, low economic growth, the transition to AI, digitalization and new environmental standards, as well as heightened geopolitical risks.  If commercial banks and other lending institutions fail to analyse correctly their credit risk exposures and update their forecasting models, they could be exposed to material credit losses. This course helps a wide range of credit professionals deal with the analytical, structuring, and forecasting challenges they face today.

We first review methods that can help to spot signs of creative accounting and fraud – these include financial and non-financial factors. analyse complex accounts, group structures and situations, using more advanced analytical and structuring techniques for assessing, limiting and offsetting credit risks.  If there is sufficient time, we will assess parent/subsidiary credit linkages and also how to apply notching to layered capital structures.  We also examine debt structuring and how to help a borrower construct an optimal capital structure. Finally, we review how to analyse deteriorating and distressed credits – how to spot early warning signs of a weakening credit profile and how to restructure firms worth saving.

Principal topics covered during this course will include:

  • Forensic accounting - learn how to spot red flags of creative accounting and fraud
  • How firms may manipulate GAAP and non-GAAP figures
  • Recommended adjustments to financial statements
  • Complex group structures
  • Understanding the credit impact of different consolidation methods
  • Parent and subsidiary rating linkage
  • Debt structuring - creating an optimal capital structure for a client, including debt layering, subject to minimizing WACC and market constraints
  • Debt capacity considerations
  • Understanding how different types of hybrid securities are rated and how they can impact credit quality
  • Deteriorating credits, potential and actual NPLs: warning signs and strategies for restructuring the firm and minimizing loss
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