Corporate Credit Analysis Training Courses | Redcliffe Training (2024)

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; dealing with accretion expense; dealing with 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
• Non-current assets – financial assets, including derivatives
• 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
• Valuation approaches, realisability, vulnerability to write-downs
• The usefulness of non-current and current assets as security
• The relative size of non-current versus current assets and the firm’s capital intensity
• 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, retirement benefit deficit
• Long-term debt, leases and other financial liabilities
• Off-balance sheet liabilities
• Vendor funding exposure, recourse financing, contingent liabilities, receivables factoring, recourse non-consolidated funding, guarantees and other
• The equity base and reserves
• Tangible net worth
• Negative equity
• NCI
• Leverage analysis
• What constitutes gross and net debt? – Including pension deficits, certain provisions, derivatives, leases and certain off-balance sheet exposures
• Accounting for leases (IFRS 16)
• The impact of hybrid debt
• The debt maturity profile
• Liquidity analysis
• How can we analyse if the firm will run out of cash?
• The sources and uses of 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
• 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
• Are NWC movements important? Is the NWC seasonal?
• 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 is it impacted by leases?
• 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 and Security Factors

• 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

Corporate Credit Analysis Training Conclusion

• Review of a rating scorecard to assess a baseline rating
• Estimating a baseline rating taking into account sovereign, industry, financial ratio and financial policy factors