Corporate Credit Analysis & Financial Modeling

This 4-day program is designed for bankers, credit and product specialists and other professionals responsible for maintaining top quality loan portfolios, identifying risk management opportunities and designing financial solutions for clients in a new and evolving international credit environment. The banking industry has emerged from its deepest crisis since the Great Depression with sub-prime and other toxic assets wiping out the capital of many once viable banks. As a result, risk and portfolio management, loan valuation methods, and governance structures are all being shaken up top to bottom. There is widespread agreement particularly amongst regulators that financial institutions need to rethink credit policies, procedures, and risks they are taking – now that lending will soon be up and running again. This course explores the dynamics of obligor risk from the perspective of a new credit setting and shows how to make wise credit decisions and optimally manage lending portfolios. We make use of the newest credit management tools that will become bank standard through the world including advanced cash flow and projection analysis, industry specific internal risk rating systems, knowing clients, portfolio management and loan valuation. The bottom line: lenders who learn how to take prudent risks and protect their financial institutions will advance careers and win business when the loan faucet is finally turned on. In this course delegates will learn to: Polish credit skills and develop critical analytical decision-making processes Know how to price loans and allocate capital in today’s world Apply state-of-the art cash flow techniques to uncover accounting shenanigans Refresh existing analytical skills and consolidated knowledge into a framework and toolkit for post crisis credit analysis More efficiently apply advanced analytical tools to better understand changes in economic, industry and company conditions Create an optimal portfolio mix given allocation of loan exposures across multiple industries Improve analysis of credit risk exposures under stressful conditions Know how global exposures systems contribute to Basel III compliance Chose and apply the most appropriate optimization modelling tools to loan portfolios Learn how to build and use interactive and local corporate and specialized lending risk rating systems Know the framework of Basel III Better understand changes in economic, industry and company conditions with respect to the proposed Basel III countercyclical buffer Apply migration risk and learn how to use risk matrices to price and value loans, and govern the loan portfolio optimally Deal with workout situations and develop short term/long term turnaround strategies Develop valuations utilizing state-of-the-art valuation software to determine and evaluate “value gaps”, probability of default, and correlation matrices Who Should Attend Credit managers and analysts Accountants Corporate and bank consultants Treasury managers Risk and financial analysts Corporate and investment bankers who want to lean how post 2012 credit is analysed and managed Research and ratings personnel Portfolio managers Bank regulators Management and strategy venture capital executives
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