Debt Structuring using Cash Flow Modelling

Session 1: Why Cash Flow Analysis is Central to Credit Risk Analysis and 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
• The assessment of liquidity, 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 is reviewing and understanding the client’s strategy for working capital management essential for good cash flow management
• Credit Risk Workshop: 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.

Session 2: Identification of Key Areas of Cash Flow Analysis Used in Credit Risk Analysis and 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 will 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 the following morning.

Session 3: 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 crystallisation 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: You will create a risk management table for the Food Processing company, reviewed after day 1 of the course. The focus will be on assessing what risk mitigants the banker could include in the loan document to protect the bank’s credit risk exposure to the client.

Session 4: 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 principal 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 crystallisation 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 the forecast DSCR year-on-year
• Cash flow loan structuring workshop: During these last two sessions, 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 to 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.

Summary and Closing

Redcliffe’s cash flow modelling course expert is a professional banking and finance trainer. For 17 years, he 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 corporates, 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.

This debt structuring course will cover the following:

• Understand 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
• Assessing the importance of external risk analysis on the company’s ability to generate cash flows over the life of the loan
• 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

This course is a must-know 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 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, cash flow creation, forecasting and debt and loan structuring.

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

This course will empower delegates with the knowledge of how to assess the client’s ability to make a success of their businesses over time and how to generate enough 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 structure and sensitise base case and downside case lending scenarios as part of our debt structuring. This is to ensure the creation of loan repayment schedules that can be realistically repaid from anticipated cash flow while protecting the bank’s debt exposure.

Learning techniques are a mixture of formal presentations, written materials, assignments and case studies. Heavy emphasis is on learning through analysing practical examples of corporate loan candidates. All case studies are 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 on solving practical issues is a core to the learning method of this programme.

Debt structuring using cash flow modelling training has active delegate participation. Delegates will present their findings and solutions to their colleagues in class via the screen-sharing option available through the online platform.

To maximise the training time available 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.