Fundamentals of Corporate Credit Analysis

Section 1: Corporate Credit Analysis Training Introduction

• Review of a framework to help delegates learn the key aspects of credit analysis

• Review of the rating agencies’ approach to rating corporates

Section 2: Credit Fundamentals: Analysing the Financial Statements

Section 2.1: How Key Line Items in the Income Statement Impact Credit Analysis

• Revenues: key drivers, risks and growth outlook; the impact of IFRS 15

• The cost base: key drivers, operating leverage and scope for changes

• Capitalisation of costs

• Analysing EBITDA in detail

• Pitfalls of using adjusted EBITDA: avoiding EBITDA add-ons

• Analysing earnings quality

• Gross and net finance expense: What to include

• Dealing with capitalised and PIK interest, accretion expense and hybrid securities

Dealing with leases (IFRS 16)

Dealing with entities accounted for using the equity method – are they a credit positive, neutral or negative?

Dealing with provisions – charges and write-backs

Taxation considerations

Adjustments for NCI

Case studies: re-organising the income statement, adjusting for non-recurring, non-core and other items and deriving underlying earnings; calculating and analysing key credit ratios: margins (gross, EBITDA, EBIT, pre-tax, net), interest cover, basic and augmented dividend cover

Section 2.2: How Key Line Items in the Statement of Financial Position Impact Credit Analysis

• Non-current assets – tangible: Valuation basis, life and replacement cycle, asset quality, vulnerability to write-downs, hidden asset value, capex versus depreciation

Non-current assets – intangible

Valuation approach, vulnerability to write-downs, hidden asset value

Non-current assets – investments in equity-accounted entities

Deferred tax assets:

• Why do they arise? Vulnerability to write-down

Current assets:

• Trade receivables: ageing, the potential for bad debts and provisioning

• Other receivables: what are these? Will they be collected?

• Inventories: potential for obsolescence and write-downs

• Cash and other financial assets

• Restricted cash balances

Current liabilities:

• Trade and other payables

• Short-term debt, leases and supplier finance

• Analysing net working capital, including seasonality

Long-term liabilities:

• Provisions, deferred tax, deferred revenues, and retirement benefit deficit

• Long-term debt, leases and other financial liabilities

Off-balance sheet liabilities:

• Contingent liabilities, receivables factoring

The equity base and reserves:

• Tangible net worth

• Negative equity

• NCI

Leverage analysis:

• What constitutes gross and net debt? This section includes pension deficits, certain provisions, derivatives, leases and certain off-balance sheet exposures

• Accounting for leases (IFRS 16)

• The debt maturity profile

Liquidity analysis:

• How can we analyse if the firm will run out of cash?

• The sources and uses of the funds approach

• What is the reliance on external funding?

• Will undrawn facilities be available?

Key credit analysis ratios: various leverage ratios, liquidity ratios, current ratios, quick ratios, cash coverage ratios, asset coverage, working capital ratios (inventory turnover, accounts receivable turnover, accounts payable turnover), intangible assets/equity, ROIC, ROE, asset turnover, DuPont analysis.

Corporate credit analysis training case studies: Analysis of the balance sheets of firms in different sectors; practising balance sheet ratios

Section 2.3: How Key Line Items in the Cash Flow Statement Impact Credit Analysis

• The direct and indirect approach to cash flow

• Deriving operating cash flow

• Reconciling operating cash flow to operating earnings

• The impact of provisions and deferred tax on cash flow

• Why finance income, finance expense and tax may differ in the cash flow statement from the income statement

• Analysing investment spending:  Is it sufficient to generate growth?

• Will it yield a return?

• How do leases impact it?

• Can the company generate enough cash flow to cover its capital expenditure?

Analysing financing movements:

• Changes in debt and equity

• Can the cash flow cover any dividends to NCI and shareholders and debt repayments?

• Is the firm undertaking share buybacks?

Ratio analysis:

• Cash coverage ratios for net finance expense, capital spending and dividends

• Debt service ratios DSCR

• FFO/debt

• FFO/net debt

• RCF/net debt

Cash conversion ratios

Dependence on new funding

Case studies: Analysis of the cash flow statements of firms in a range of sectors; practising cash flow ratio analysis

Subordination, Structural & Security Factors

• This corporate credit analysis course assesses the different types of subordination

• Structural considerations

• Double leverage

• Security, covenants and guarantees

• How the rating agencies reflect security, structural factors and jurisdictions in their notching

• Ownership considerations

• Case study – assessing the risks in a given group structure

Understanding Credit Ratings

• Different types of rating

• How the rating agencies determine a corporate rating

• Review of a rating scorecard and assess a baseline rating

• Estimating a baseline rating taking into account sovereign, industry, financial ratio and financial policy factors

Training Objectives

This corporate credit analysis course will help you:

• Understand the fundamentals of corporate credit analysis. Comprehensive guidelines will enable you to conduct the credit analysis of a company.

• Practise analytical techniques applied across a wide range of industries and firms.

• Detailed quantitative risk analysis of a group’s historic and forecast results.

• Analyse income statements with a focus on deriving underlying earnings and calculating and interpreting key credit ratios.

• The cash flow statement and the sustainability and level of cash flows versus the firm’s cash outflows, including calculating key cash flow ratios.

• In the balance sheet, we focus on asset valuations, leverage, liquidity, net working capital and capital intensity and calculate key credit ratios.

• Review structural, subordination, ownership and security factors.

Training Course Summary

Redcliffe Training's corporate banking credit analysis sessions show delegates how to assess the credit profile of a firm or group and how it may evolve in the future.

We focus on analysing the historic and forecast financials, with a focus on deriving underlying earnings, sustainable cash flow, leverage, interest coverage and liquidity. Learn to calculate and analyse key credit ratios to help assess the firm’s relative operating position and financial flexibility.

We also review structural factors (structural subordination, double leverage, etc.), ownership characteristics, security and how these can impact the credit risk of a group and particular debt instruments. Delegates will analyse the key credit risk parameters and evaluate how they may change in the future, rather than only describing the historical financials.

This corporate credit analysis course and its material will not leave you with gaps in knowledge or application.