Corporate Credit Analysis & Financial Modelling

5 days 9-13 May 2016, London £4,895.00 + VAT* Download brochure Add to basket
5 days 22-26 Aug 2016, London £4,895.00 + VAT* Download brochure Add to basket
5 days 18-22 Sep 2016, Dubai £4,595.00 Download brochure Add to basket
4 days 10-13 Oct 2016, New York $4,845.00 Download brochure Add to basket
5 days 7-11 Nov 2016, Hong Kong $6,800.00 Download brochure Add to basket
5 days 5-9 Dec 2016, London £4,895.00 + VAT* Download brochure Add to basket

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Overview

Course background

Through every business cycle, banks and other financial institutions lose billions of dollars as a result of their failure to analyse credit risk correctly and to foresee downside risks. Even if these institutions do not suffer direct financial losses due to default / market movements, they may be receiving an inadequate return for the risks involved. Given the increasing use of leverage by both the private and public equity markets, combined with heightened sovereign/geo-political risks, in-depth credit analysis is essential to avoiding credit and currency losses. The aim of this course is to teach delegates how to analyse corporate credit risk and how to assess an appropriate return. This course does not extend to the analysis of banks, insurance companies or structured vehicles.


How will this course assist you?

  • Through case study analysis you will learn to analyse thoroughly different types of corporates to allow you to make sound business decisions.
  • During the five day course, we will cover:
  • The bank loan and bond markets
  • Qualitative risk analysis: sovereign, industry & company specific
  • Quantitative risk analysis including key credit ratios
  • Credit ratings & the rating agencies
  • Impact of corporate finance activity on credit quality
  • Financial modeling in Excel, including LBOs
  • How to apply sensitivity analysis
  • Documentation: high grade & high yield prospectuses, loan document
  • Default predictors & recovery rates
  • Structural & contractual subordination 

 

Who should attend

  • Bank credit officers
  • Investment bankers
  • Management consultants
  • Bond credit analysts
  • Fixed income/credit traders
  • Fixed income/credit sales people
  • Fund managers
  • Treasurers
  • Compliance officers
  • Financial decision makers in corporations
  • Instructors

    We work with a series of expert instructors, please select the course location of interest to review the credentials of who will be delivering the programme.

    London
    Sarah Martin

    Former Executive Director of CSFB and Lehman Brothers, the Course Director has spent seventeen years working as an investment banker in Europe and the US. She has principally worked in the credit markets and has experience of the US and European high grade and high yield markets, the European new issue markets, the Asian convertible bond markets and of corporate restructurings of distressed credits. She specialised in the telecoms sector and was closely involved in the structuring, raising and/or trading of bank and public debt for telecoms companies in many countries, including Europe, South Africa, Asia and Latin America. She also has extensive experience of corporate finance transactions, including mergers, disposals, privatisations, IPOs and capital raisings. Until 2003, she was an Executive Director at Lehman Brothers in Fixed Income Research in London, having also worked for CS First Boston and Kleinwort Benson. She now works on an independent basis advising the legal and private equity professions on credit analysis and company valuation. She has a degree in economics from the London School of Economics and stock exchange qualifications from London and New York.

    London
    Sarah Martin

    Former Executive Director of CSFB and Lehman Brothers, the Course Director has spent seventeen years working as an investment banker in Europe and the US. She has principally worked in the credit markets and has experience of the US and European high grade and high yield markets, the European new issue markets, the Asian convertible bond markets and of corporate restructurings of distressed credits. She specialised in the telecoms sector and was closely involved in the structuring, raising and/or trading of bank and public debt for telecoms companies in many countries, including Europe, South Africa, Asia and Latin America. She also has extensive experience of corporate finance transactions, including mergers, disposals, privatisations, IPOs and capital raisings. Until 2003, she was an Executive Director at Lehman Brothers in Fixed Income Research in London, having also worked for CS First Boston and Kleinwort Benson. She now works on an independent basis advising the legal and private equity professions on credit analysis and company valuation. She has a degree in economics from the London School of Economics and stock exchange qualifications from London and New York.

    New York
    Morton Glantz

    The course director is an internationally renowned educator, author, and banker. He serves as a financial consultant, educator, and adviser to a broad spectrum of professionals, including corporate financial executives, government ministers, privatisation managers, investment and commercial bankers, public accounting firms, members of merger and acquisition teams, strategic planning executives, management consultants, attorneys, and representatives of foreign governments and international banks. He is a principal of firms specialising in risk consulting, training, certification, and advanced analytical software in the areas of risk quantification, analysis, and management solutions.

    As a senior officer of JP Morgan Chase, the course director built a progressive career path specialising in credit analysis and credit risk management, risk grading systems, valuation models, and professional training. He was instrumental in the reorganization and development of the credit analysis module of the Bank’s 3 Management Training Program—Finance, which at the time was recognised as one of the foremost training programs in the banking industry. A partial list of client companies he has worked with includes The Federal Financial Institutions Examination Council, Institutional Investor, The Development Bank of Southern Africa, CUCORP, Canada, East African Development Bank, NBS Bank, Malawi, Access Bank, Nigeria, The Central Bank of Nigeria, The Bank of China, GE Capital, Cyprus Development Bank, Misr Iran Development Bank (Cairo), Gulf Bank (Kuwait), Institute for International Research (Dubai), Inter-American Investment Corporation, Ernst & Young, UAL Merchant Bank ( Johannesburg), Euromoney, ICICI Bank (India), Council for Trade and Economic Cooperation (Russia), BHF Bank, and IBM Credit Corporation.

    The course instructor is on the adjunct finance faculty at the Fordham Graduate School of Business. He has appeared in Harvard University International Directory of Business and Management Scholars and Research and earned Fordham University Deans Award for Faculty Excellence on three occasions. He is a Board Member of the International Standards Board, International Institute of Professional Education and Research (IIPER). The IIPER is a global institute with partners and offices around the world, including the United States, Switzerland, Hong Kong, Mexico, Portugal, Singapore, Nigeria, and Malaysia. Areas of expertise include advanced forecasting methods; advanced credit risk analysis; credit portfolio risk management; essentials of corporate finance; corporate valuation modelling and analysis; credit risk analysis and modelling; project finance and corporate failure.

    He received an MBA Finance from New York University; B.B.A., magna cum laude Baruch College, City University of New York. He is widely published in financial journals and has authored seven books published internationally.

    Dubai
    Sarah Martin

    Former Executive Director of CSFB and Lehman Brothers, the Course Director has spent seventeen years working as an investment banker in Europe and the US. She has principally worked in the credit markets and has experience of the US and European high grade and high yield markets, the European new issue markets, the Asian convertible bond markets and of corporate restructurings of distressed credits. She specialised in the telecoms sector and was closely involved in the structuring, raising and/or trading of bank and public debt for telecoms companies in many countries, including Europe, South Africa, Asia and Latin America. She also has extensive experience of corporate finance transactions, including mergers, disposals, privatisations, IPOs and capital raisings. Until 2003, she was an Executive Director at Lehman Brothers in Fixed Income Research in London, having also worked for CS First Boston and Kleinwort Benson. She now works on an independent basis advising the legal and private equity professions on credit analysis and company valuation. She has a degree in economics from the London School of Economics and stock exchange qualifications from London and New York.

    Hong Kong
    Sarah Martin

    Former Executive Director of CSFB and Lehman Brothers, the Course Director has spent seventeen years working as an investment banker in Europe and the US. She has principally worked in the credit markets and has experience of the US and European high grade and high yield markets, the European new issue markets, the Asian convertible bond markets and of corporate restructurings of distressed credits. She specialised in the telecoms sector and was closely involved in the structuring, raising and/or trading of bank and public debt for telecoms companies in many countries, including Europe, South Africa, Asia and Latin America. She also has extensive experience of corporate finance transactions, including mergers, disposals, privatisations, IPOs and capital raisings. Until 2003, she was an Executive Director at Lehman Brothers in Fixed Income Research in London, having also worked for CS First Boston and Kleinwort Benson. She now works on an independent basis advising the legal and private equity professions on credit analysis and company valuation. She has a degree in economics from the London School of Economics and stock exchange qualifications from London and New York.

    Venue

    London

    Central London Hotel Venue

    All courses are held at four or five star venues in Central London, Zone 1. We strive to provide you with a training environment of the highest quality, to ensure that the whole learning experience exceeds your expectations.

    Your training venue will be confirmed by one of our course administrators approximately 3-4 weeks before the course start date.

    Dubai

    Dubai Finance

    This programme takes place on a non-residential basis at a central 4 to 5* Dubai hotel. Non-residential course fees include training facilities, documentation, lunches and refreshments for the duration of the programme. Delegates are responsible for arranging their own accommodation, however, a list of convenient hotels (many at specially negotiated rates) is available upon registration.

    New York

    New York Hotel

    This program takes place on a non-residential basis at a New York hotel. Non-residential course fees include training facilities, documentation, lunches and refreshments for the duration of the programme. Delegates are responsible for arranging their own accommodation, however, a list of convenient hotels (many at specially negotiated rates) is available upon registration.

    As with all programmes on-site administrators are with you throughout the programme to ensure smooth administration and group interaction.

    Hong Kong

    4-5 Star Hotel in Hong Kong

    All of our courses are held in 4 – 5 star hotels, chosen for their location, facilities and level of service. You can be assured of a comfortable, convenient learning environment throughout the duration of the course.

    Due to the variation in delegate numbers, we will send confirmation of the venue to you approximately 2 weeks before the start of the course. Course fees include training facilities, documentation, lunches and refreshments for the duration of the programme. Delegates are responsible for arranging their own accommodation, however, a list of convenient hotels (many at specially negotiated rates) is available upon registration.

    Related Courses

    Agenda

    Agendas are localised, please select your preferred location.

    Day 1


    Registration commences at 8.15am

    Programme runs from 8.30 – 4.30 daily

    Section 1: Types of lending

    • Different types of bank facilities
    • The bond markets - high grade and high yield
    • Credit default swaps

    Section 2: Quantitative analysis

    Review of historic results - assessment of financial position and risks

    • Analysing the P&L account
    • Understanding the sources and sustainability of revenues & earnings
    • Understanding the nature of the cost base
    • Adjusting for exceptionals, non-core earnings, discontinued items, operating leases, derivatives
    • Adjusting for joint-ventures/associates and NCI
    • Analysing EBITDAR, EBITDA, EBIT; pitfalls of using EBITDA or adjusted EBITDA
    • What constitutes finance expense, including expenses for derivatives and quasi debt
    • Ratio analysis: margins (gross, EBITDAR, EBITDA, EBIT, pre-tax, net), interest cover, basic and enhanced dividend cover
    • Analysing the cashflow statement
    • IFRC layout – operating cashflow, NWC, investment & financing
    • Reorganising the cashflow statement to show CADR
    • Differences between operating earnings and operating cashflow
    • Primary and secondary sources of debt repayment
    • Cashflow based lending vs asset based lending
    • Ratio analysis: Interest and investment coverage; debt service and debt repayment coverage, cash conversion ratios, dependence on external financing, cashflow based ROIC, dividend coverage

    Day 2


    Section 2: Quantitative analysis

    Review of historic results (continued)

    • Analysing the balance sheet
    • The asset base and consolidation policies
    • What constitutes debt – derivatives & quasi-debt
    • Off balance sheet liabilities
    • Adjusting for securitised receivables, operating leases, vendor funding, recourse financing, contingent liabilities, letters of credit, performance guarantees, retiree benefit deficits
    • Liquidity analysis
    • NCI, joint ventures & equity accounting
    • Ratio analysis: leverage, liquidity, asset coverage, working capital, ROIC, ROE, asset turnover, Dupont analysis
    • Case studies: analysis of a retailer & property company
    • Assessing debt capacity: balancing growth with asset turnover & financial policy
    • Accounting factors; how results can be manipulated


    Day 3


    Session 3: Modelling and forecasting in Excel

    • Creation of full financial forecasting models
    • Creation of assumptions – what are the critical value drivers?
    • Return analysis
    • Creation of covenant package
    • LBO model
    • Sensitivity analysis – base case, management case, downside cases
    • Case studies: modelling with Excel of historic accounts, creation of forecasts, calculation and analysis of ratios, creation of covenants. Creating a refinancing package for a cyclical company. Modelling different scenarios in one worksheet.

    Day 4


    Session 4: Business risk analysis (qualitative factors)

    • Sovereign
      - Economy, currency, credit rating, political risks
      - Key  themes for 2016
    • Industry
      - Porter’s five forces
      - Industry life cycle (growth)
      - Industry cyclicality (earnings quality)
      - Leading indicators
      - Competition
      - Pricing dynamics; demand vs. supply
      - Changing business environments
      - Regulation
      - Capital intensity and cost base
    • Case study: review credit of company in changing industry environment
    • Company specific
      - Management
      - Operating, capital and corporate finance strategies
      - Competitive advantages and cost position
      - Product/service offering, differentiation and pricing power
      - Diversification
      - Customer/supplier concentration
    • Structural factors
      - Shareholder structure
      - Ownership and support
      - Structural and contractual subordination
      - Impact of structural issues on ratings

    Session 5: Credit ratings

    • Rating scales and definitions
    • Recovery ratings
    • Relevance of sovereign ratings
    • Advantages & limitations of the rating agencies

    Session 6: Leverage analysis

    • The advantages and disadvantages of leverage: debt vs. equity
    • Suitability for leverage
    • Determinants of leverage
    • Impact of shareholder value considerations on credit quality
    • Double leverage
    • Case study: evolution of BAA’s risk and financial profile and structure of borrowing

    Day 5


    Session 7: Impact of corporate finance transactions on credit quality

    Corporate finance transactions

    • Mergers, acquisitions, disposals, breakups, demergers, LBOs, etc
    • Case studies: impact of M&A on credit quality

    Leveraged buyouts

    • Rationale to LBOs
    • Structuring an LBO
    • Quick method of modelling an LBO
    • Assessing returns to equity and subordinated lenders

    Session 8: Pricing for bonds and loans

    Session 9 : Documentation and covenants

    • What is the purpose of the loan and is it related to the repayment sources?
    • What is the structure of debt facilities?
    • Documentation
    • Overview of a loan agreement
    • Overview of high grade and high yield bond prospectuses
    • Reps and warranties, conditions precedent, negative pledge
    • MAC clauses, events of default, cross default, equity cures etc
    • Focus on covenants financial and non-financial covenants
      - Covenant definitions (financial), including off-balance sheet liabilities
      - Covenant definitions (nonfinancial) what makes for stronger or weaker covenants
      - The 8 key covenants for event and recapitalisation risks

     Course summary and close

    Day 1


    Registration commences at 8.15am

    Programme runs from 8.30 – 4.30 daily

    Section 1: Types of lending

    • Different types of bank facilities
    • The bond markets - high grade and high yield
    • Credit default swaps

    Section 2: Quantitative analysis

    Review of historic results - assessment of financial position and risks

    • Analysing the P&L account
    • Understanding the sources and sustainability of revenues & earnings
    • Understanding the nature of the cost base
    • Adjusting for exceptionals, non-core earnings, discontinued items, operating leases, derivatives
    • Adjusting for joint-ventures/associates and NCI
    • Analysing EBITDAR, EBITDA, EBIT; pitfalls of using EBITDA or adjusted EBITDA
    • What constitutes finance expense, including expenses for derivatives and quasi debt
    • Ratio analysis: margins (gross, EBITDAR, EBITDA, EBIT, pre-tax, net), interest cover, basic and enhanced dividend cover
    • Analysing the cashflow statement
    • IFRC layout – operating cashflow, NWC, investment & financing
    • Reorganising the cashflow statement to show CADR
    • Differences between operating earnings and operating cashflow
    • Primary and secondary sources of debt repayment
    • Cashflow based lending vs asset based lending
    • Ratio analysis: Interest and investment coverage; debt service and debt repayment coverage, cash conversion ratios, dependence on external financing, cashflow based ROIC, dividend coverage

    Day 2


    Section 2: Quantitative analysis

    Review of historic results (continued)

    • Analysing the balance sheet
    • The asset base and consolidation policies
    • What constitutes debt – derivatives & quasi-debt
    • Off balance sheet liabilities
    • Adjusting for securitised receivables, operating leases, vendor funding, recourse financing, contingent liabilities, letters of credit, performance guarantees, retiree benefit deficits
    • Liquidity analysis
    • NCI, joint ventures & equity accounting
    • Ratio analysis: leverage, liquidity, asset coverage, working capital, ROIC, ROE, asset turnover, Dupont analysis
    • Case studies: analysis of a retailer & property company
    • Assessing debt capacity: balancing growth with asset turnover & financial policy
    • Accounting factors; how results can be manipulated


    Day 3


    Session 3: Modelling and forecasting in Excel

    • Creation of full financial forecasting models
    • Creation of assumptions – what are the critical value drivers?
    • Return analysis
    • Creation of covenant package
    • LBO model
    • Sensitivity analysis – base case, management case, downside cases
    • Case studies: modelling with Excel of historic accounts, creation of forecasts, calculation and analysis of ratios, creation of covenants. Creating a refinancing package for a cyclical company. Modelling different scenarios in one worksheet.

    Day 4


    Session 4: Business risk analysis (qualitative factors)

    • Sovereign
      - Economy, currency, credit rating, political risks
      - Key  themes for 2016
    • Industry
      - Porter’s five forces
      - Industry life cycle (growth)
      - Industry cyclicality (earnings quality)
      - Leading indicators
      - Competition
      - Pricing dynamics; demand vs. supply
      - Changing business environments
      - Regulation
      - Capital intensity and cost base
    • Case study: review credit of company in changing industry environment
    • Company specific
      - Management
      - Operating, capital and corporate finance strategies
      - Competitive advantages and cost position
      - Product/service offering, differentiation and pricing power
      - Diversification
      - Customer/supplier concentration
    • Structural factors
      - Shareholder structure
      - Ownership and support
      - Structural and contractual subordination
      - Impact of structural issues on ratings

    Session 5: Credit ratings

    • Rating scales and definitions
    • Recovery ratings
    • Relevance of sovereign ratings
    • Advantages & limitations of the rating agencies

    Session 6: Leverage analysis

    • The advantages and disadvantages of leverage: debt vs. equity
    • Suitability for leverage
    • Determinants of leverage
    • Impact of shareholder value considerations on credit quality
    • Double leverage
    • Case study: evolution of BAA’s risk and financial profile and structure of borrowing

    Day 5


    Session 7: Impact of corporate finance transactions on credit quality

    Corporate finance transactions

    • Mergers, acquisitions, disposals, breakups, demergers, LBOs, etc
    • Case studies: impact of M&A on credit quality

    Leveraged buyouts

    • Rationale to LBOs
    • Structuring an LBO
    • Quick method of modelling an LBO
    • Assessing returns to equity and subordinated lenders

    Session 8: Pricing for bonds and loans

    Session 9 : Documentation and covenants

    • What is the purpose of the loan and is it related to the repayment sources?
    • What is the structure of debt facilities?
    • Documentation
    • Overview of a loan agreement
    • Overview of high grade and high yield bond prospectuses
    • Reps and warranties, conditions precedent, negative pledge
    • MAC clauses, events of default, cross default, equity cures etc
    • Focus on covenants financial and non-financial covenants
      - Covenant definitions (financial), including off-balance sheet liabilities
      - Covenant definitions (nonfinancial) what makes for stronger or weaker covenants
      - The 8 key covenants for event and recapitalisation risks

     Course summary and close

    Day 1

    Assessing Business Risk and Financial Risk of a Corporation

    We examine developments in credit analysis that fosters credit culture by helping banks better manage their portfolios, assist with acquisitions to ensure they are accomplished smoothly, and establish a common approach to profitable delivery of credit to the marketplace.  Lenders who survive and prosper today will most likely be those who get assistance from sophisticated credit tools designed to help price loans and manage risk effectively.

    • Key risk factors leading into decisions or recommendation
    • The Prism credit model
    • Structure, price, monitor & manage loans
    • On the information provided, determine the timing for disbursing funds and establish a repayment arrangement
    • Business operations & bank relationship
    • Loan purpose and repayment
    • Protecting the loan: setting up a matrix system
    • Understand importance of covenants
    • Monitor and manage loans and build upon client relationship

    Analysis of a weak credit: Crochet Candy Corporation

    Review of Moody’s-KMV Concept: Distance-To-Default

    • Determining expected and unexpected default
    • Cause-and effect model of default
    • Differences between default and risk and how to calculate each
    • Relationship of asset values, asset volatility and debt levels
    • Moody’s default point
    • Deriving distance-to-default

    Know Both Client and Business

    • Keys to make the bank-client relationship work
    • Reconciliation of conflicting demands, bank and customer
    • Understanding management role of your customer’s business
    • Internal scrutiny at the business level
    • Assessment of the business' strengths and weakness' against each of the most relevant competitors
    • Competitive landscape
    • The appraisal report and shareholder valuation
    • Industry risks and current market conditions
    • Know industry specific questions to ask management

    Corporate Strategy and Swot Analysis

    SWOT analysis is a strategic planning method used to evaluate the Strengths, Weaknesses, Opportunities, and Threats involved in an obligor’s project or in a business venture. It involves specifying the objective of the business venture or project and identifying the internal and external factors that are favorable and unfavorable to achieve that objective.

    • Porter's generic strategies: competitive advantage; differentiation
    • Strengths: characteristics of the business or team that give it an advantage over others in the industry
    • Weaknesses: are characteristics that place the firm at a disadvantage relative to others
    • Opportunities: external chances to make greater sales or profits in the environment
    • Threats: external elements in the environment that could cause trouble for the business

    Cash Flow and Multivariate Ratio Analytical Workshop

    • Merging multivariate ratio analysis and cash flow
    • What are sources and uses of cash?
    • Developing a bankers cash flow statement
    • Reconciliation how to spot funny money”
    • Check lists that insure reliability of your cash flow analysis
    • Cash flow analysis of projects and joint ventures in Asia
    • The art of merging cash flow and ratio analysis
    • How does cash flow know-how help bankers build up value drivers

    Case study –Oscar Products: Analysis of ratios and introduction to cash flow

    Case study –Gem Furniture: Reconstruction of cash flow and analysis

    Case study –Farmers Connection – Forensic cash flow structure and deal analysis –Local Workout Deal

    Day 2

    Standard versus Modern Forecasting: Suitable Methodology for the Modern Banker

    • Adjusting critical assumptions and value drivers including economic and industry analysis, operating profit margins, working capital requirements, capital expenditures, cost of capital
    • Overview financial projections
    • Statistical tools in today’s computer environment that create high quality projections
    • Sensitivity analysis versus simulations
    • Adjusting critical assumptions and value drivers
    • How to write up and/or present effective projection analysis
    • Understanding an obligor’s financial needs
    • Sensitivity analysis versus Stochastic (simulations) projections
      -Defining assumptions
      -Defining forecasts
      -Working with confidence levels
    • Determining default frequencies

    Exercise: Piece of Cake Company. Using simulation software to compare deterministic and stochastic projections:

    Case Study: International Drug Corporation Delegates determine appropriate (stochastic) distributions, the forecast variable, run simulations, select (frequency chart) confidence levels, call up reports and evaluate project managers’ proposal to the bank.

    Harvard Case Study: Savannah West Delegates work in teams to evaluate risk under uncertainty arrives at a decision and firm loan structure.  

    Analyzing the Obligor’s Business, Industry and Risk Profile

    • Analysing sector specific drivers
    • Industry loan portfolio methodology
    • Company operations, key competitors, the impact of economic factors, the pattern of industry growth and earnings
    • Identifying and quantifying risk factors in Hong Kong industries

    Case Study: Printing Industry: How to develop a comprehensive/professional industry analysis

    Day 3

    Introduction to Basel III

    • Relevant details of Basel III implementation in context with robust credit/portfolio analytics
    • Differences between Basel II and Basel III
    • Tier 1 (core) capital ratio
    • Other capital ratios
    • Purpose of capital conservation buffer
    • Supplemental capital
    • Discussion of the countercyclical buffer range
    • Regulatory capital ratio
    • Resolution of differences between total capital requirements and tier 1 requirement
    • Dealing with excessive credit growth and acceleration of the build-up of the conservation buffer

    Class Discussion – Basel III Pros and Cons

    Default Correlations and Loan Portfolio Management

    • Deriving default correlations
    • The equity driven approach
    • Other approaches (spread correlation)
    • Recent empirical findings on correlation
    • Default correlations and targeting the “Efficient Frontier”

    Case study – Rating Agency Analysis of Portfolio Credit Linked Note

    Portfolio and Resource Optimization

    • Identify a borrower’s optimal maximum/minimum values subject to constraints
    • How to handle nonlinear relationships using stochastic optimization to analyze financing of corporate restructurings
    • Portfolio optimization and efficient allocation of resources and projects, along with efficient frontiers
    • Chose and apply the most appropriate optimization method to loan portfolios: discrete, dynamic or stochastic optimization,
    • Rolled-up projects: correlated with one another
    • Creating an optimal portfolio mix given allocation of loan exposures across multiple industries

    Case study – RI Furniture Corporation. Using stochastic optimization and valuation models to evaluate the credit risk of corporate restructuring

    Workshop: Portfolio Allocation With Correlations: Optimizing a Loan Portfolio

    Framework for Developing Stochastic Computerized Pricing Models

    • Class discuscion: how do banks price loans
    • Past, present and future of loan pricing
    • Incorporating computerized risk rating systems into the pricing matrix to determine hurdle ROE, ROA and RAROC (the loan area requires)
    • How the facility’s  “expected loss frequency” affects the pricing of the facility
    • Credit VaR and risk-adjusted performance measurement
    • Loan servicing and activity costs
    • The “fee-in-lieu-of-balances” calculation
    • Determining probabilities loan pricing falls below RAROC mandated by the bank/profit center

    Day 4

    Valuing the Obligor’s Business - Comparing Valuation Methods

    • Performing a liquidation valuation (assets, collateral and residual value)
    • Step-by-step development of a comprehensive corporate appraisal
    • Book value method
    • Liquidation vs. cash flow value: restructuring decision making
    • Last transaction approach
    • Valuation multiples approach
    • Cash flow valuation
    • Advantages and disadvantages of each method
    • Stochastic valuation: employing state-of-the-art valuation software
    • Assessing success probabilities

    Financial Distress Models and a New Approach to Problems in the Loan Portfolio

    • Workouts at local banks
    • Class discussion: regulatory issues managing problem loans 
    • Checklist of storm signals
    • Financial distress models
    • Valuation
    • Borrowing base facility
    • Auditing techniques
    • How to stop the bleeding
    • Short term vs. long term workout strategies

    Harvard Case Study: Westlake Lanes: How Can This Business Be Saved?

    Debt and Corporate Restructuring: Alternatives and Implications

    • Asset swaps
    • Stochastic resolution of “value gaps”
    • Equity swaps
      -Stock exchanged for debt forgiveness
      -Stochastic valuations uses: equity swaps
    • Modification of debt terms
    • Developing the McKinsey restructuring pentagon
      -The restructuring  pentagon framework
    • Closing value and perception gaps
    • Valuing a multibusiness
    • Determining capital costs and capital structure of a multibusiness
    • Performing business unit valuations
    • Spin offs, sell offs, equity carve outs and LBO’s

    Case Study: AFCE Enterprises: Computer analysis and valuation of strategic divestitures of major company brands

    How to Develop Interactive (Local Environment) Industry Specific Credit Rating Grids for Borrowers/Facilities

    • The risk grading process
    • Risk rating & loan portfolio Optimisation
    • Ratings grids and loss given default
    • Standards & guidelines: Basel II and regulatory issues
    • Borrower and transaction risks
    • Evaluating and setting up obligor financial measure weights
    • Evaluation collateral & guarantees
    • Transfer and portfolio risk
    • Specialized lending advanced risk rating systems
      -Project finance
      -Commodity finance
      -Object finance
      -Income producing real estate

    Fundamentals of Loan Pricing
    By combining precise credit analysis with risk-adjusted pricing, a bank can reasonably anticipate a target return on all classes of loans.

    • Class discussion: how do banks price loans?
    • The past, present and future of loan pricing
    • Determining loan loss reserve
    • Determining additional loan loss reserve when the loan is downgraded
    • Loan pricing sensitivities (how changes in the following affect change in ROA)
    • Increased funding costs and loan loss expense
    • Equity reserve requirement
    • Spreads over base rate
    • The ‘fee-in-lieu-of-balances’ calculation
    • Loan servicing and activity costs
    • Using potential loss to allocate capital
    • Determining capital to be set aside for potential losses
    • Evaluating computerized pricing model

    Global Exposure Systems and Loan Management

    Today, setting up and implementing an efficient, comprehensive global exposure system will help banks get back into lending confidently and represents a major step toward Basel III compliance... The GES is an exposure management tool and information system that facilitates the approval and review of credit related exposure to commercial customers and provides a detailed database that is used for a variety of risk monitoring, reporting and management purposes.

    • How is the GES a major step toward Basel III compliance
    • Portfolio exposure management
    • How to set up the reporting function within a GES
    • Management reporting
    • Exception reports
    • Credit administration reports
    • Communication with senior management
    • Indirect exposures: third party undertaking
    • Corporate risk management
    • Divisional exposure management
    • Regulatory / external reporting
    • GES source of important data

    Loan Policy and Procedures of an International Bank

    The role of monitoring and control in risk management Delegates review issues dealing with credit administration, responsibilities of the credit approval process together with the credit review function. Focus is the Bank’s loan policy.

    • The role of credit administration at the bank
    • Credit policy committee
    • Setting up statements of loan policy
    • CAMELS bank rating system

    Course summary and close

    Day 1

    Section 1: Types of lending

    • Different types of bank facilities
    • The bond markets - high grade and high yield
    • Credit default swaps

    Section 2: Quantitative analysis

    Review of historic results - assessment of financial position and risks

    • Analysing the P&L account
    • Understanding the sources and sustainability of revenues & earnings
    • Understanding the nature of the cost base
    • Adjusting for exceptionals, non-core earnings, discontinued items, operating leases, derivatives
    • Adjusting for joint-ventures/associates and NCI
    • Analysing EBITDAR, EBITDA, EBIT; pitfalls of using EBITDA or adjusted EBITDA
    • What constitutes finance expense, including expenses for derivatives and quasi debt
    • Ratio analysis: margins (gross, EBITDAR, EBITDA, EBIT, pre-tax, net), interest cover, basic and enhanced dividend cover
    • Analysing the cashflow statement
    • IFRC layout – operating cashflow, NWC, investment & financing
    • Reorganising the cashflow statement to show CADR
    • Differences between operating earnings and operating cashflow
    • Primary and secondary sources of debt repayment
    • Cashflow based lending vs asset based lending
    • Ratio analysis: Interest and investment coverage; debt service and debt repayment coverage, cash conversion ratios, dependence on external financing, cashflow based ROIC, dividend coverage

    Day 2


    Section 2: Quantitative analysis

    Review of historic results (continued)

    • Analysing the balance sheet
    • The asset base and consolidation policies
    • What constitutes debt – derivatives & quasi-debt
    • Off balance sheet liabilities
    • Adjusting for securitised receivables, operating leases, vendor funding, recourse financing, contingent liabilities, letters of credit, performance guarantees, retiree benefit deficits
    • Liquidity analysis
    • NCI, joint ventures & equity accounting
    • Ratio analysis: leverage, liquidity, asset coverage, working capital, ROIC, ROE, asset turnover, Dupont analysis
    • Case studies: analysis of a retailer & property company
    • Assessing debt capacity: balancing growth with asset turnover & financial policy
    • Accounting factors; how results can be manipulated


    Day 3


    Session 3: Modelling and forecasting in Excel

    • Creation of full financial forecasting models
    • Creation of assumptions – what are the critical value drivers?
    • Return analysis
    • Creation of covenant package
    • LBO model
    • Sensitivity analysis – base case, management case, downside cases
    • Case studies: modelling with Excel of historic accounts, creation of forecasts, calculation and analysis of ratios, creation of covenants. Creating a refinancing package for a cyclical company. Modelling different scenarios in one worksheet.

    Day 4


    Session 4: Business risk analysis (qualitative factors)

    • Sovereign
      - Economy, currency, credit rating, political risks
      - Key  themes for 2016
    • Industry
      - Porter’s five forces
      - Industry life cycle (growth)
      - Industry cyclicality (earnings quality)
      - Leading indicators
      - Competition
      - Pricing dynamics; demand vs. supply
      - Changing business environments
      - Regulation
      - Capital intensity and cost base
    • Case study: review credit of company in changing industry environment
    • Company specific
      - Management
      - Operating, capital and corporate finance strategies
      - Competitive advantages and cost position
      - Product/service offering, differentiation and pricing power
      - Diversification
      - Customer/supplier concentration
    • Structural factors
      - Shareholder structure
      - Ownership and support
      - Structural and contractual subordination
      - Impact of structural issues on ratings

    Session 5: Credit ratings

    • Rating scales and definitions
    • Recovery ratings
    • Relevance of sovereign ratings
    • Advantages & limitations of the rating agencies

    Session 6: Leverage analysis

    • The advantages and disadvantages of leverage: debt vs. equity
    • Suitability for leverage
    • Determinants of leverage
    • Impact of shareholder value considerations on credit quality
    • Double leverage
    • Case study: evolution of BAA’s risk and financial profile and structure of borrowing

    Day 5


    Session 7: Impact of corporate finance transactions on credit quality

    Corporate finance transactions

    • Mergers, acquisitions, disposals, breakups, demergers, LBOs, etc
    • Case studies: impact of M&A on credit quality

    Leveraged buyouts

    • Rationale to LBOs
    • Structuring an LBO
    • Quick method of modelling an LBO
    • Assessing returns to equity and subordinated lenders

    Session 8: Pricing for bonds and loans

    Session 9 : Documentation and covenants

    • What is the purpose of the loan and is it related to the repayment sources?
    • What is the structure of debt facilities?
    • Documentation
    • Overview of a loan agreement
    • Overview of high grade and high yield bond prospectuses
    • Reps and warranties, conditions precedent, negative pledge
    • MAC clauses, events of default, cross default, equity cures etc
    • Focus on covenants financial and non-financial covenants
      - Covenant definitions (financial), including off-balance sheet liabilities
      - Covenant definitions (nonfinancial) what makes for stronger or weaker covenants
      - The 8 key covenants for event and recapitalisation risks

     Course summary and close

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