Debt Structuring using Cash Flow Modelling

Debt Structuring Course Session 1: Why Cash Flow Analysis is Central to Credit Risk Analysis and in Debt Structuring

• Review of the key ratios used in holistic credit risk analysis based on cash flow analysis
• Overview of the importance of the Debt Service Coverage Ratio in understanding the company’s ability to cover debt financing service through cash flow generation
• Understanding why EBITDA does not spell Cash flow
• Cash flow modelling training includes the assessment of liquidity and cash drivers and their impact on cash flows
• The impact of working capital management on cash flows from operations
• Calculation of the company’s working capital needs and their impact on the client’s cash flow generation
• The importance and need for controlled and effective working capital management in the client company
• Why reviewing and understanding the client’s strategy for working capital management is essential for good cash flow management
• Credit Risk Workshop: the delegates will review a case study question of a fast-growing trading company that is seeking to raise debt financing for the expansion of its existing activities. The delegates in their project groups will be required to assess the company’s business and financial performance to date and therefore whether they would be interested in financing the company’s activities.

Debt Structuring Course Session 2: Identification of Key Areas of Cash Flow Analysis Used in Credit Risk Analysis and in Debt Flow Structuring

• Review of the key components of the cash flow statement under IAS 7
• The importance of operating cash flows in understanding the ability of the company to honour its debt capacity
• Review of the cash flows for Investing and Financing activities in terms of their impact on the DSCR
• Assessing additions to Plant and equipment in the cash flows from investing activities, with the real commitment to capital maintenance expenditure
• The role of the cash flow statement in analysing the financial performance of the company and how we can assess cash receipts and payments over the reporting period
• Review of additional amendments to Adjusted Earnings in cash flow calculations and their impact on operating cash flows (the impact of provisioning and impairments on cash flows)
• Cash flow analysis Workshop: the delegates will review several different cash flow statements from international companies and undertake a detailed credit analysis but focus on the key areas of the cash flow statement. We will assess the development of cash flow and the lessons that can be learned from identifying management action and its impact on cash flow generation.
• Course home preparation: The delegates will review a new corporate case study about a privately run food production company. As prep they will need to undertake a credit risk assessment of the company and construct the Net Operating Cash flows of the company for discussion during the following morning.

Debt Structuring Course Session 3: How to Create a Cash Flow Statement from the Income Statement and Balance Sheet

• To kick start session 3, cash flow modelling training begins with a review of the previous evening’s home preparation work covering the new food processing case study company.
• The delegates will be required to create two separate cash flow statements for two different company accounts. This exercise will allow the delegates to develop the following skills:

• A better understanding of cash flow construction to allow them to analyse cash flow statements from clients in more detail and understand the key credit drivers arising from their analysis of cash flows
• The ability to put together summary cash flow statements for credit analysis purposes if the client does not produce or provide cash flow statements during the initial stages of the bank’s relationship with the client
• They develop a better understanding of the impact of company operations on cash flow generation over time
• Understanding the difference between the Indirect and Direct methods of cash flow statement generation and their use in the financial management of the business

• Cash flow workshops: The delegates will construct two separate cash flow statements for two different clients using the customer’s income statement and balance sheets. Both cash flow statements will be created using the Indirect Method. This process is important for the creation of new cash flow forecasts in Excel.

Debt Structuring Course Session 4: Using Excel Cash Flows and the Cash Flow Statement Assess the Company’s Ability to Meet its Obligations Through Sensitivity Analysis and Forecast Risk Crystallisation

• Introduction to a financial cash flow model in Excel used to sensitise the impact of risk crystallization on the company’s future cash flows
• Assessing the impact of risk crystallisation events on the client’s ability to honour its debt service through cash flow generation
• Reviewing an international risk management framework to manage potential client risks by:

• Identifying risks
• Assessing risks through their probability and impact and
• Mitigating risks using the risk mitigation model TARA model

• Sensitivity analysis using cash flow forecasts in an Excel model to assess which risks provided the greatest downside impact to the company’s projections and its ability to service debt.
• Using the Cash Conversion Ratio to assess the efficiency of management in working capital and other cash flow items
• Assessing the cash flows from investment activities and longer-term additions to PPE in comparison to depreciation
• Review of the uses and sources of cash flow from/to investing activities to understand the destination of the company’s cash and assess these items as potential Early Warning Signals
• Assessment of sources and uses of cash flow from financing and investing cash flows
• Cash flow workshops: Delegates will work through the cash flow forecasts of a major dairy company seeking to expand its operations and refinance part of its loan book.

• Firstly, the delegates will use the international risk management framework to identify and assess the principal risks that will affect the company’s forecast cash flows and its ability to service its debts.
• Once the delegates have identified the key potential risks affecting the case study, they will use the Excel financial model of the company’s cash flow forecasts to undertake a sensitivity analysis to assess the impact on the company’s DSCR of risk crystallisation. The delegates will create differing scenarios based on differing downside assumptions of the key cost and income drivers associated with the company’s forecasts.

• Course home preparation: The delegates will create a risk management table for the Food Processing company reviewed after day 1 of the course. The focus will be to assess what risk mitigants the banker could include in the loan document to protect the bank’s credit risk exposure to the client.

Debt Structuring Course Session 5: Using Excel Cash Flows and Cash Flow Forecasting to Structure the Client’s Long-Term Loan

• Review of the credit risk analysis of a new client company in the food production business undertaken as home preparatory work
• Review of the company’s historic cash flows to assess the company’s ability to honour its debt service as part of its overall credit risk analysis
• Using the international risk management framework introduced in the previous session the delegates will identify the key credit risks arising from the case
• Using cash flows to assess the impact of principle risks on the client’s ability to honour its debt repayment as denoted through the forecast Debt Service Coverage Ratio (DSCR), over the lifetime of the loan
• Stressing the cash flow forecasts to assess the impact of risk crystallization on the company’s debt service capacity through the Debt Service Coverage Ratio
• As part of this sensitivity analysis, the delegates will assess the project’s key sales and cost assumptions to assess which have the greatest impact on the company’s ability to service debt
• Using the cash flow forecasts to assess the facility structuring and the repayment schedule for the client company’s debt facility
• The importance of creating a base case and downside case of the cash flow forecasts and why we should structure the loan against the downside case
• Why the base case should reflect the most likely outcome based on the delegate's detailed due diligence
• Structuring the repayment schedule in the light of the company’s credit risk rating and its interest charges in line with forecast DSCR year-on-year
• Cash flow loan structuring workshop: During these last two sessions the delegates will use the forecast cash flow model of the meat producer client to structure new loans for the company. They will be free to use the Excel model to assess which type of loans to provide the company, including long-term loans as well as short-term working capital facilities. They will use the model to assess the overall debt capacity of the company to honour their new loan book, based on their new forecast cash flow assumptions.

Debt Structuring Course Session 6: Creating a Loan Term Sheet Including Debt Covenants, Pledges and Asset Security Based on the Cash Flow Sensitivity Analysis

• Key clauses to be included in the term sheet and loan documentation
• Creating a term sheet for the prospective financing options for the case study
• Using the cash flow forecasts to assess the level of financial ratios that should be included in the structured loan documentation to act as Early Warning Signals post-drawdown
• Presenting the different financing options created by the project teams to the rest of the delegates who will act as a credit committee
• Using the cash flow forecasts to assess the company’s potential Enterprise Value
• Key financial and non-financial covenants including their role as Early Warning Signals
• The pitfalls of covenant-light lending
• Key Affirmative and Negative pledges included in loan documentation for SMEs
• Typical security including types and coverage
• Governing law
• Examples of key ratios from banks’ lending in emerging markets and to higher-risk clients
• Loan term structuring workshop: Following on, the delegates will draft a term sheet for the company, to include the key covenants and conditions with which the company would need to comply as part of their loan agreement. As part of that exercise, the delegates will sensitise the forecasts to derive the levels of key financial ratios that they will include in the loan documentation. Finally, we will briefly review how we can calculate the estimated Enterprise Value of the company using the same cash flow forecasts discounted to reflect the time value of money and assess the impact on the company’s valuation in the event of changing business and financial assumptions.

Summary and Closing

Redcliffe’s cash flow modelling course trainer is a professional banking and finance trainer who for 17 years has been training 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 your trainer established his own investment banking advisory firm which focuses on credit arrangement, capital restructuring, M&A, private placements and IPOs. He and his team work with regional and international clients in firstly 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 has built up over his extensive banking career to training and developing banking delegates. He is currently developing many 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 cash flow modelling training course and beyond.

• Understanding why the cash flow forecasting model is central to the future successful servicing of the client company’s loan obligations.
• Use of the Debt Service Coverage & Cash Ratios to understand the client’s credit risks and ability to honour its debt service.
• Creating cash flow forecasts from the company’s forecast Income Statement and Balance Sheet to assess the client’s future DSCR.
• Assessing the importance of external risk analysis on the company’s ability to generate cash flows over the life of the loan is covered within this cash flow modelling training course.
• Taking into consideration the economic impact and the business cycle on the company’s ability to generate future cash flows.
• Using forecast cash flow analysis through financial modelling to assess the impact of key risk crystallisation on the company’s cash flows and its DSCR (debt service coverage ratio).
• Sensitising the cash flow forecasts to assess the direct impact of risk crystallisation on the company’s ability to repay.
• Creating and using Base Case financial models and Downside Case financial models to structure the client’s new lending facility including the loan term and repayment schedule.
• During cash flow modelling training we review the important structuring and loan covenants used in mitigating risk in financing corporate clients (key asset collateral, financial ratios, affirmative and negative pledges, key man life insurance, etc) whether large corporates or privately-run companies.

Fundamental to the cash flow modelling course content is to empower delegates with the knowledge of how to assess the client’s ability to make a success of their businesses over time and therefore how to generate sufficient levels of free cash flow to repay their loans. Through the use and application of financial modelling and sensitivity analysis using Microsoft Excel, Redcliffe Training's cash flow modelling training course allows delegates to measure anticipated risk impact on the client’s corporate cash flows and client debt repayment through the Debt Service Coverage Ratio.

We will use applied real-world debt structuring case studies and their financial models to understand the impact of credit risk on cash flow generation. We will therefore structure and sensitise base case and downside case lending scenarios as part of our debt structuring to ensure the creation of loan repayment schedules that can be realistically repaid from anticipated cash flow while protecting the bank’s debt exposure.

In addition, the cash flow modelling course will focus on structuring the loan agreement to include secondary sources of debt repayment including guarantees, asset pledges and other covenants that should be included in the term loan document to protect the bank’s exposure.

This cash flow modelling training course is designed for corporate credit bankers at a more advanced stage of their corporate credit careers. Usually, delegates have over five years of experience and are beginning to structure corporate deals with the need to understand principal credit terms and conditions that can be used to mitigate credit risk through the loan structure.

Our debt structuring course is therefore especially useful for corporate credit banking executives who have already developed a good working knowledge of holistic corporate credit risk analysis but who want to enhance their knowledge with applied techniques in cash flow analysis, cashflow creation, forecasting and debt and loan structuring.

Who Should Attend?

This cash flow modelling course is designed for corporate credit bankers who are at a more advanced stage of their corporate credit careers, usually with over five years of experience, who are beginning to structure corporate deals and need to understand the principal credit terms and conditions that can be used to mitigate credit risk through the loan structure.

It is therefore especially useful for corporate credit banking executives who have already developed a good working knowledge of holistic corporate credit risk analysis but who want to enhance their knowledge with applied techniques in cash flow analysis, creation, forecasting and debt and loan structuring.

As part of case study work incorporated in this cash flow modelling course, delegates will devise financial projections and forecast cash flows using Excel cash flow models provided by the trainer. A working knowledge of Microsoft Excel will, therefore, be a strong advantage for the completion of the course.

Course Overview and Content

Fundamental to the cash flow modelling course content is to empower the delegates with the knowledge of how to assess the client’s ability to make a success of their businesses over time and therefore how to generate sufficient levels of free cash flow to repay their loans. Through the use and application of financial modelling and sensitivity analysis using Microsoft Excel, this program allows the delegate to measure anticipated risk impact on the client’s corporate cash flows and client debt repayment through the Debt Service Coverage Ratio.

We will use applied real-world debt structuring in banking case studies and their financial models to understand the impact of credit risk on cash flow generation. We will therefore structure and sensitise base case and downside case lending scenarios as part of our debt structuring to ensure the creation of loan repayment schedules that can be realistically repaid from anticipated cash flow while protecting the bank’s debt exposure.

In addition, this cash flow modelling training course will focus on structuring the loan agreement to include secondary sources of debt repayment including guarantees, asset pledges and other covenants that should be included in the term loan document to protect the bank’s exposure.

Training Methodology

Redcliffe’s online debt structuring training course is delivered through a highly interactive online platform and separated into eight, 90-minute sessions, delivered over three consecutive days. Delegates work through case study exercises and questions in project groups and with the course trainer.

Learning techniques are a mixture of formal presentations, written materials, assignments and case studies with a heavy emphasis on learning through analysing practical examples of corporate loan candidates. All case studies are used from real-life working examples and can include client companies of the bank, particularly non-performing loans. Sharing already developed knowledge and learning to work closely in solving practical issues, is a core to the learning methodology of this programme.

Debt structuring using cash flow modelling training is designed with active delegate participation as a core theme of the workshop. Delegates will be required to present their findings and solutions to their colleagues in class via the screen-sharing option available through the online platform.

Additional Reading and Preparation

To maximise the training time available to delegates during the daily online sessions, we will be asking delegates to prepare work between the sessions. This will include reading case studies in advance and preparing some discussion topics for the following sessions.