Course Category

Day One: Credit Risk Assessment - Investment Grade Companies

The role of credit analysis & risk management

• Review of recent high profile bankruptcies and defaults of former investment grade companies
• Fundamentals are back at the fore in today’s market
• Techniques for analyzing the credit cycle
• The growing role of credit analysis and risk management since the late 90’s

Volatility in the Market Place

• Review of debt market volatility
• Impact of increased volatility; greater requirement for portfolio adjustment, investment fund shift towards less risky investments to maintain set volatility parameters

Overview of default rates and recovery rates

• Global default statistics – analysis of frequency of defaults and speed of migration from investment grade to defaulting credit
• Recovery rates – analysis of trends, what does the secondary market show?
• Global liquidity review, what is the appetite for stocks at the lower investment grade levels? Response of fund managers to bonds approaching sub investment grade, effect on spreads

Session Two: The Rating Agencies

• Definitions of default - Banks, rating agencies and ISDA
• Analytical differences – the banks and the rating agencies; ratings based on senior unsecured lending – position of a bondholder; banks can alter risk profile e.g. structuring with triggers, taking security and step ups in the event of a downgrade
• The rating agency approach – rate through the cycle; rationale and implications
• Examples where rating agencies lagged the debt and equity markets e.g. Asian sovereign debt crisis of ’97, Tyco, Vivendi, Argentina. Trainer facilitated group discussion: Should the rating agencies move towards more frequent ratings?
• The viscous circle - How rating downgrades can trigger liquidity crises

Session Three: Industry and Corporate Strategy

• Utilizing a risk evaluation framework: market, industry, company specific, management
• Review of useful approaches: The Porter Model, SWOT analysis, company specific analysis

Analyzing management

• Strategy overview
• Measuring management results; are management delivering results, signs to look out for and examples:
• Importance of controls on management; e.g. composition of the board, management compensation
• Importance of establishing investor trust in the management team
• Importance of management communication to investors/ lenders, impact of poor communication
• ROE, Market Value, Net Book Value, Enterprise Value – can we use these to establish management competence? What are the pitfalls?

Session Four: The Balance Sheet and Income Statements

• The business cycle and working capital
• Working capital financing – key principles, CP lines and standby credit facilities – access to the markets and dangers for banks / investors
• Analyzing goodwill and intangibles – what are they worth
• Off balance sheet items: leases, partnerships, contingent liabilities
• Creative accounting and fraud
• Problems with comparability and consistency of earnings
• Standard and Poor's new view on ''Core'' Earnings

Session Five: The Importance of Cash Flow

• Interpreting cash flows
• Differences between company produced and derived cash flows
• Analysis of cash drivers
• Operating cash flow, net operating cash flow, EBITDA – when and how to use the different cash flow measures
• Pitfalls of EBITDA

Day Two: Credit Risk Assessment - LBO's and High Yield

• Size of high yield / LBO market
• What is investor appetite for high yield / LBO in current market?
• High yield vs. LBO – differentiating factors; rationale for use and some advantages and disadvantages of combination financings
• Trading of bank debt – investment grade and high-yield

Session Two: Evaluation of the borrower/issuer

• Industry and company dynamics, what industry and company characteristics do investors and lenders seek?
• Depth and experience of management – what are the characteristics of an effective and well-balanced management team?
• Projected cash flows and stress testing – key measures and how to use them
• Capital structures and their impact on ratings and spreads
• Rules of thumb for return requirements at the different levels of capital structure
• Primary and secondary sources of repayment
• Assessing negative EBITDA companies

Session Three: Evaluation of the issue

• Structural subordination; how is this achieved
• The relationship between senior and subordinated lenders
• Some practical issues which complicate subordination in default situations
• The role and influence of the equity holder
• Bond structures - the value of covenants and other features
• The value of collateral
• Default statistics and recovery values

Session Four : Early Warning Signs

• Credit Cycle
• Industry
• Financial Statements
• Covenant compliance
• Bank internal warning signs
• Management warning signs
• Fall from investment grade to high yield

Market tools

• Forward looking market tools
• KMV
• Creditgrades
• CreditSights

Day Three: Group Cases

• If lending money, why do I need to value a company?
• Use of multiples; Revenue, EBITDA, P/E, P/E to growth
• Asset-based, Net Book Value, Market to Book
• Dividend discount model
• Free cash flow;

Session Two: Common cash flow valuation pitfalls

• Determining free cash flow
• Selecting the discount rate
• Projection periods and terminal values
• When growth rates change

Session Three: Cost of Capital

• Cost of Debt Review; Yield-to-maturity, Impact of taxes, Bank debt, Straight bonds: Fixed vs. floating rate, Convertible bonds
• Cost of Equity Review; Preferred Shares, Common Shares, Dividend Discount Model, Capital Asset Pricing Model
• o beta
• o equity risk premium
• Weighted Average Cost of Capital; recap of methodology