Early Warning Signals and How to Handle Distressed Debt

Day 1

Introduction to the aims of the course

Session 1 - Identifying Corporate problem loans before they turn bad – the early warning signals using ratio analysis and quantitative analysis.

• Principal issues posed by non-performing loans
• Assessing the fundamental impact on the bank of nonperforming loans
• Impact on the SME and Larger corporate client
• Impact on problem loan shareholders and stakeholders
• Loan foreclosure versus debt restructuring – the lose - lose scenario
• Alternatives to foreclosure
• Debt restructuring and the potential win – win scenario
• Assess market problems and competitive forces
• Understanding competitive forces in the industry and client’s position in the market
• Critical success factors and delivering success
• Poor corporate governance
• The importance of trend analysis as part of ratio analysis
• Spotting off balance sheet items that will affect company risk profiles
• Spotting ongoing capital expenditure needs and identifying methods of financing
• Identifying potential corporate failure

Session 2 – Using financial analysis to identify key EWS of financial distress

• Ratio analysis as a key tool in early warning analysis for distressed debt
  • Key financial drivers and EWS and the need for constant vigilance
  • The problems with overreliance on the financial statements and the importance of leading EWS
• Developing underlying assumptions of quantitative analysis
• Trend analysis and the importance of identifying the trend
• Red Flag lists and assessment of three principal Red Flag areas covering
  • Financial red flags
  • Business red flags
  • Internal red flags
• The Z score and its use in identifying potential corporate failure
• Case Study: Review of a corporate case study’s financial statements whereby delegates will review the identify key EWS risks associated with the company going forward.

Session 3 – The importance of liquidty and spotting signs of overtrading and poor working capital management

• The importance of good working capital management
• The impact of poor working capital management on corporate liquidity and survival
• Calculating the net working capital needs of the company
• Methods in improving working capital generation
• The importance of liquidity in distressed client companies
• Methods in improving company liquidity and cash flow through improved working capital management
• Methods implemented by turnaround managers to increase liquidity in companies
• Introduction to different risks in Emerging markets.
• Credit risk, business risk, operating risk, management risk
• Risk identification in developing markets
• Risk profiling
• Risk mitigation through different strategies
• Case Study: during this session, the delegates will analyse the working capital needs of a corporate client and assess how working capital problems can threaten the going concern. They will also assess how the Corporate can increase its liquidity through intelligent working capital management.

Session 4 – Leading Early Warning Signals arising from the external environment and from management behaviour

• Understanding the ‘big picture’ and potential pitfalls for the company
• Understanding a client’s general business environment
  • The application of the PESTEL model
• Understanding the company’s SWOT
• Assessing the competitive forces at work in an SME client’s industry with a view to understanding its ability to make profits
  • Application of Porter’s Five forces
• The assessment of the strength of a company’s product and service portfolio and its chances of survival as a going concern
  • Product Life Cycle
  • Portfolio Analysis
• What management behaviour can be one of the best leading signs of potential corporate distress
• Reviewing different management behavioural patterns that can be an indicator of potential distrss
• The importance of observing and monitoring client behaviour and their importance as EWS

EWS Qualitative Work Shop

Workshop: Delegates in groups to undertake and present a qualitative analysis of a, family run company. Delegates to discuss potential areas of assistance in debt restructuring for the company.

Day 2

Session 5 – Identifying potential strategies to assist the distressed client in avoiding default

• Taking immediate action when the company is showing signs of distress and engaging with management to understand the extent and cause of the problem.
• Using decision tress analysis to understand what actions to take
• Review and application of the IFC matrix to a distressed borrower
• The importance of trusting management and the need for cooperation in deciding the optimum recovery strategy for the client.
• What we can do with company management in the event of default; application of Butler’s Matrix.
• Assessing in court and out of course settlement as alternatives for corporate recovery
• Why the going concern solutions provides a great likelihood of exposure recovery.
• Working with the borrower’s management to identify strategies for liquidity preservation and generation; measures that the company can take to reduce the working capital cycle.
• Workshop: We will review distressed case study scenarios and use the frameworks covered during the session to distressed case study examples. 

Session 6 – Assessing the Distressed client’s potential viability and valuing the non performing loan between the serviceable and non-serviceability elements of the corporate loan

• The need and importance of the preliminary assessment of the distressed corporate client’s viability to understand the design of the restructuring plan.
• Reviewing the carrying value of the Non Performing Loan on the bank’s balance sheet
• Review of two methods in understanding the carrying value of the distressed debt
• Identifying the serviceable element of the loan that can be repaid through the recovery cash flows
• Steps to take in auditing the client’s recovery plan and recovery cashflows
• Measures to improve the loan security and terms and conditions for the restructured debt facility
• Conditions when banks may implement haircuts to assist in the preservation of the going concern with the view to maximising potential exposure recovery.
• The importance of restructuring any problem loans in line with the Bank’s credit procedures and risk appetite.
• The sale of distressed debt as a means of exit for the borrower
• Strategies for dealing with the Non Serviceable element of the distressed loan, including, PIK, Warrants, Debt to Asset Swaps, Debt to Equity Swaps etc and the advantages and disadvantages of each.
• Workshop: During this session we will examine how to calculate the Serviceable element of the distressed debt from recovery cash flows. We will also assess a case study of how a Bank decided to refinance the distressed loan and the decisions that led to its action regarding the treatment of the Non Serviceable element of the loan.

Session 7 - Restructuring the corporate loan – Amend and Extend not Extend and Pretend and the importance of the Operating and Financial Restructuring

• Assessing when the corporate client can and cannot be saved - Identifying the need to take action
• Assessing the costs of liquidation versus the costs of maintaining the going concern.
• Conditions when Rescheduling and Moratoria are enough to avoid default and when they are not
• The importance of the Operating Restructuring to improve company performance longer term and why it should precede the Financial Restructuring
• The importance of managing the actions of other bilateral lenders – the concept of Automatic Stay and Standstill
• Implementing the Moratorium through the Standstill Agreement
• Key concepts underlying the agreement and Automatic Stay
• Review of a draft Standstill Agreement
• Drafting the Standstill Agreement
• The use and importance of the Independent Business Review in assisting the banker to design the best recovery strategy for the medium sized corporate.
• Workshop: The delegates will draft a Standstill Agreement for a corporate case study developed during the course. The standstill agreement will be negotiated with a delegate team chosen to represent the interests of the company. The agreement of these negotiations will be presented in class. Review of the use and application of the IBR is finding a structured recovery solution.

Session 8 – Implementing the recovery plan

• Assessing the need for corporate stabilisation and emergency liquidity creation and funding
• The importance of trusting corporate management to cooperate in the workout process
• Assessing the risk parameters and increasing financial covenants for the restructured loan going forward.
• Reviewing the projected recovery strategy in detail with management
• Identifying key risks that will affect the corporate client’s recovery plan
• Using sensitivity analysis on the client’s cash flow forecast model to understand the impact of major risks on the company’s ability to repay its debts
• Understanding different corporate stakeholder interests and how to manage them as part of the process
• Using a 5-point plan for effective restructuring as implemented internationally by banks
• The importance of the primary review in in assessing the viability of the problem loan
• Application of the IBR in implementing a deep dive Operating Restructuring analysis of the company to find long term solutions for the survival of the distressed client
• Assessing the least cost alternative to debt recovery
• Protecting security throughout the workout
• Workshop: During this final workshop we will review a major new distressed debt case study and apply the restructuring process discussed during the day, to maximise the potential return of existing exposure to the bank. This workshop will require the application of frameworks to identify the optimum recover strategy, identify action that needs to be taken to improve management and also work with the company’s managers to derive an effective recovery strategy. 

Using an excel forecast cash flow model, we will assess the likelihood of the company to be able to restructure the serviceable element of the distressed debt and identify solutions that we could implement in order to maximise the repayment of the bank’s outstanding exposure. We will also identify strategies for the management of the unserviceable bank debt

Course conclusion and evaluations

For 22 years, the trainer has trained students in banking, finance, credit analysis, debt restructuring and loan workout, risk management, strategic management and corporate governance compliance.

Cooperating with some of the world’s leading training companies, he has trained delegates from some of the largest industrial and financial institutions across Europe and the Middle East. In parallel to his lecturing career, the trainer has a 27-year career in banking and finance, initiated in the City of London. A core element of his work through Capital Advisers is helping companies restructure their debt and equity position to strengthen company viability through their restructured Balance Sheets. It is this practical hands-on experience of balance sheet restructuring that he brings to cash flow modelling training and workshops that he develops for clients.

In 1993, he joined Hill Samuel Bank, the London-based merchant bank, covering International Project Finance and later became a credit analyst in Asset-Based Finance. Lending directly to international shipping companies. He briefly joined N M Rothschild in London as a member of the bank’s LBO credit team, analysing clients and providing leveraged debt facilities to UK corporate, before joining Charterhouse Bank in 1997, where he began his Corporate Finance career. Assisting companies to strengthen their balance sheets through debt and equity restructuring has been part of his professional work since he started in banking.

In late 1999, he joined EBRD as the bank’s acting deputy director for Romania. In this role, he led teams of credit analysts in identifying and completing a significant number of credit facilities for Romanian and international companies. During his last year in the post in 2002, EBRD financed a total of €500 million in debt and equity financing for projects in the country.

In 2003, he established an investment banking advisory firm. This focuses on credit arrangement, capital restructuring, M&A, private placements and IPOs. He and his team work with regional and international clients in restructuring client company balance sheets. Central to this role is identifying companies with good potential credit ratings that will become attractive clients for international banks and financiers. In 2006, his advisory became the exclusive representative of HSBC Investment Bank in Romania.

In parallel, the trainer initiated his career as a professional lecturer in 2003, applying much of the knowledge that he had built up over his extensive banking career to training and developing banking delegates. He is currently developing tailored courses for leading banking and financial institutions across China, Europe, the Middle East and the Far East.

He trains in both English and Spanish across this debt structuring course and beyond.

The course objectives and areas covered during the course, will include the following:

• Reviewing key Early Warning Signals that can indicate distress in the corporate client
• Identifying Leading EWS that provide time for the banker to take action
• Identifying and assessing key leading EWS of distressed debt
• The importance of assessing the external business and economic environment in order to identify leading external risk events and taking action to mitigate these risks
• Assessing management behaviour and why this is an area of leading EWS in distressed debt
• Reviewing actions that bankers can take with managers in order to avoid problem loans, defaulting.
• Learning lessons from high profile corporate failure
• Assessing different types of corporate loan default
• Assessing the importance of liquidity and working capital management in saving the going concern.
• Assessing when the loan needs to be restructured, the client company turned around, or put into Corporate Recovery
• Understanding when a situation can be salvaged and when it can’t.
• Understanding which trigger events can lead to the corporate restructuring
• Understanding how to choose the correct restructuring and workout strategy for each problem loan client and applying the IFC restructuring strategy matrix
• Knowing when to ‘pull the trigger’ as a banker and when to be pragmatic in maximising potential exposure return (when haircuts might be the best way out)
• The importance in management character and trusting management during the workout
• Applying an international framework to problem loan workout in order to assess how to treat and enhance management as part of the workout process.
• Using cash flow forecasts from the recovery strategy in order to measure the serviceable and unserviceable element of the problem loan
• Why the financial restructuring alone is often not enough to solved the root cause of the problem
• The need for an independent review (IBR) in designing the required Operating restructuring of the problem loan
• How to deal with other bilateral lenders in a distressed loan situation (standstill agreements)
• The need for cost benefit analysis in choosing the best, low-cost restructuring plan
• The importance of negotiating with and gaining the support of other powerful stakeholders in order to implement a successful workout process.

Many Early Warning Signals courses focus on identifying financial ratios and trends that can be a portent of corporate default. However given the time lagging nature of financial statements, a company might already be too deeply in trouble to avoid defaut, once signs of finanical distress are identified in the accounts. What makes this course different is that although we will review financial EWS at the beginning of the course, our main focus will be on understanding the impact that leading external, strategic and management  defects and mistakes can take have on the client’s future solvency before the company’s difficulties become too far gone to rescue. The course also provides practical insights into what corrective actions the corporate banker can take early on to avoid the client being transferred to the bank’s recovery department.

This course is designed for Corporate Credit Officers, Lending Relationship Officers, SME bankers, and Portfolio Managers who need to assess and monitor their clients’ solvency and ability to repay the bank.

This course offers the delegate a technical tool kit to be applied directly to their client credit risk and monitoring responsibilities, so that they can spot potential leading signs of danger and take corrective action with management, in order to avoid default. The cof technical It focuses directly on the economic and financial challenges that both large corporates and SMEs are currently facing in 2024 and 2025 as a result of increased interest rates since the beginning of 2022 and economic headwinds in key markets including the Eurozone as well as the political and economic turbulence caused by wars in the Middle East and in Ukraine.  The course will also assess the impact on the corporate sector of disrupted global trade affected by potential increased global tariffs arising from the incoming US administration.

The principal objectives of this programme are to provide lenders with a developed understanding of the areas that need to be monitored in identifying signs of potetnial distress and default among clients and potential clients. The programme focuses primarily on those leading factors of distress and potential default that once identified, provide bankers with sufficient lead time to engage with client management and to take corrective actions, to avoid potential default. We will also assess practical methods used in early problem loan workout, and the steps that bankers can take to avoid default of their corporate borrowers.  

It is assumed that the professional experience of the delegates attending this course is intermediate to senior and therefore basic credit and financial EWS analysis will be assumed knowledge although we will be revisiting key areas of ratio analysis as part of the theoretical credit risk review. The workshop will focus heavily on the successful and practical implementation of this theory with real life scenarios through case study analysis across a wide range of different industries. The EWS and distressed debt tools and techniques shared and applied through the programme’s workshops will provide the core learning tools for this course. We will be drawing on a range of international best practice for problem loan workout and applying these to the context of the existing business environment.