Corporate Credit Analysis

The overall goal of this 4 day programme is to enhance existing analytic skills, using a structured and systematic approach to evaluate the credit standing of a company and the relative attractiveness of the risk ~ return profile of the investing/lending proposition.       

Participants are encouraged to become more time efficient, focused and concise in articulating credit judgement. Specifically participants will be equipped to:

• Apply a 4-step model to assess the creditworthiness of a borrower: Purpose, payback, risks and structure.
• Evaluate the performance of a company based on a qualitative approach, backed by appropriate quantitative analysis (ratios and cash flow tools) to support a lending decision.
• Use appropriate market indicators, where available (e.g. ratings, equity indicators, bond and CDS spreads) to understand refinancing risk and the market view on a credit.
• Anticipate a company’s future performance and credit outlook using a cash flow approach to ascertain its ability to service/refinance its debt as it comes due.
• Sensitise forecasts for key variables and interpret the results and their effect on creditworthiness.
• Critique bond and loan structures to assess both the ability to meet the commercial needs of the borrower and protect the lender’s interests.

This programme makes extensive use of case studies, live examples and exercises to ensure that the training is highly interactive, practical, topical and challenging.  Case studies are drawn from a number of countries and industries and provide participants with the opportunity to practise the application of the analytic frameworks and tools in context.  The emphasis is on developing critical judgement; participants are required to be focused, practical and realistic in their approach.

The illustration case study, which is included in the pre-course material, will be followed throughout the course.  Participants will be asked to apply the frameworks and tools of analysis taught during the workshop to this company.  In addition, participants will also be expected to prepare a case study for a group presentation on the final day of the programme. Work on this case study will begin during the course.

Course Content

INTRODUCTIONS AND OVERVIEW

ANALYTIC OVERVIEW
Quantifying credit risk
• Cost of credit: probability of default and loss given default.
• Credit charges: expected loss at different rating levels.
• Migration risk: focusing on the credits with the highest risk of migration.
Structured approach to analysis
• A framework for credit assessment: purpose, payback, risks and structure.
• Purpose: identifying the borrower and use of funds.
• Payback: linking credit assessment to primary and secondary sources of repayment.
• Risks to repayment: the need for a sector and company analysis to evaluate debt servicing ability.
• Structure: assessing the ability of the debt to meet the commercial needs of a company while protecting lenders’ interest.
• Rating agency approach to credit: issue and issuer.
        Market indicators of credit risk
• Market indicators as early warning signals of refinancing risk.
• Credit Ratings: rating trend and outlook.
• Debt market: bond spreads versus rating curves.
• Equity signals: share price movements and key multiples.

RISK I: MACRO CONSIDERATIONS
The operating environment
• Impact of key macro variables on company performance.
o Cyclicality: economic, commodity, technology etc. 
o Social and political considerations.
o Government regulations, taxation and licensing requirements.
Sector
• Understanding the structure of an industry and the key players operating within it.
• Growth dynamics and potential of a sector.
• Competitive forces: using the Porter Model to assess sector profitability.
• Concluding on critical success factors and a company's ability to sustain a competitive advantage in the future.
• Key sector financial drivers: expectations for sales growth, operating profit margins, working capital requirements, and capital expenditure needs.

RISK II: BUSINESS RISK
Business strategy
• Understanding a company's commercial strategy in context of market conditions.
• Anticipating likely financial statement configuration in light of business strategy.

RISK II: BUSINESS RISK
Earnings dynamics
• Assessing the strategic direction of the firm: sales and operating profitability, sources of operating cash flow, trend and peer analysis
• Accounting considerations: impact of IFRS, potential accounting distortions.
• Quantifying performance looking beyond EBITDA: defining, calculating and using operating cash flow to analyse profitability.
• Key ratio and cash flow benchmarks for evaluating earnings and operating cash flow.
• Methods of evaluating overall performance: ROE, economic value added and market indicators such as total shareholder return and enterprise value/EBITDA.
• Interpreting the Income Statement: concluding on (geographical and divisional) historic performance, identifying information gaps, anticipating future performance.
Asset investment
• Using the business conversion cycle to create expectations about balance sheet and income statement performance of companies in the same sector.
• Key ratio and cash flow indicators to evaluate asset efficiency and estimate free cash flow.
• Use of peer analysis and industry bench-marks to assess and compare performance. 
• Forecasting and sensitising key variables: working capital and capital expenditure.
• Interpreting measures to assess working capital and fixed asset management: contrasting performance within sectors – useful measures and anomalies.
Forecasting business and risk profiles
• Determining key industry drivers and company sensitivities
• Assessing forecasts of operating performance and asset investment requirements: checking for reasonableness and consistency.

RISK III: FINANCIAL RISK
Financial strategy
• Using business risk to gauge the appropriate level of financial risk.
• Understanding corporate treasury objectives: tenor matching, funding and liquidity needs.

RISK III: FINANCIAL RISK
Financial flexibility and liquidity
• Defining, measuring and evaluating liquidity.
• Refinancing risk: evaluating payment readiness, contingency liquidity and maturity profile of debt.
• Qualitative and quantitative approach to assess financial flexibility and liquidity: appropriate ratio and cash flow tools.
• Understanding financial risk in financial instruments used.
• Maximising liquidity and minimising refinancing risk in context of current market conditions.
Solvency and debt service capability
• Defining, measuring and evaluating solvency using ratios and the cash flow statement.
• Adjusting traditional ratios for off balance sheet risk: pensions, operating leases etc.

• Using rating medians to benchmark a company’s financial standing.
• Using cash flow forecasts to assess debt service capability.
• Assessing debt capacity based on present value of cash flow available for debt service.
• Concluding on financial risk in context of business risk and markets.

RISK III: FINANCIAL RISK
Solvency and debt service capability (cont…)
• Preparing forecasts using different scenarios: upside, downside, break-even.
• Working with a forecasting model to determine a company’s debt capacity.
Assessing the risk profile of funding instruments
• Factors which influence funding strategies: strategic business direction, access to alternative sources of capital.
• Unravelling the impact of a company's funding strategy on the income statement.

RISK IV: MANAGEMENT AND OWNERSHIP
• Management competence: what are we looking for, how is it measured?
• Corporate aims and goals: their effect on the company's future creditworthiness.
• Evaluating shareholder support and influence.

CASE STUDY
• Using the frameworks and tools to structure the analysis in a succinct format.
• Integrating qualitative analysis with quantitative measures.
• Presentation of credit analysis to the group: articulating credit judgement.

STRUCTURE
Assessing the structure of the transaction: debt, ranking, safeguards and pricing
• Debt profile: assessing the appropriateness of the structure in terms of amount, currency and maturity.
• Ranking: understanding different ways subordination can be achieved.
• Safeguards: the use of covenants and other techniques to mitigate risk.
• Credit pricing: evaluating the risk ~ return profile of the transaction.

GROUP CASE STUDIES
Preparation
• Group work in teams to make a presentation highlighting key risks to repayment, appropriateness of funding structure, and assessment of market pricing.  
Presentations and debrief
• Presentation of credit assessment.
• Concluding on creditworthiness and future outlook.
• Lessons learned from the case presentations.

COURSE DEBRIEF AND CLOSE

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