Deteriorating Credits

Course review:

A three-day workshop for experienced credit risk managers and fixed income investors. The training will provide a systematic approach to identifying early warning signals which can be applied to companies in different sectors.

For prices, dates and locations please contact Anita Kinrade on

Course Objectives

This two-day masterclass will provide a structured and systematic approach for identifying early warning signals, which can be applied to companies in different sectors.

The aim is to equip participants with the knowledge and skills to proactively:

• Apply a structured analytic approach to uncover early warning signals using financial, non-financial and market indicators
• Identify the likely triggers or events which would change the credit standing of a company in the future
• Extract recurring themes and lessons learned from recent examples of credit deterioration
• Review the role of debt structures in providing signals and safeguards for creditors in a distress situation.

Target Audience

Experienced credit risk managers and fixed income investors.

The majority of Fitch Training programmes are offered at an intermediate and advanced level. There are no specific prerequisite courses to attend our programmes, however some topic knowledge maybe required. Please refer to the target audience to see what level of prior knowledge is required for a specific course.

ContentANALYTIC OVERVIEWSigns of distress

• Common features of problem credits
• Symptoms of a company’s deteriorating credit standing: financial, non-financial and market indicators
• Cost of credit: credit migration for fallen angels; need to spend 80% of time on 20% of the credits that are vulnerable

Structured analytic approach

• Four step approach to focus on key issues: purpose, payback, risks and structure
• Purpose of the borrowing: evaluate appropriateness and assessing the potential for structural subordination
• Primary and secondary sources of payback: refinancing alternatives, volatility of cash-flow profits over time and potential impairment of market value of assets
• Risks to repayment: Identify the key macro, sector and company specific business and financial risks which might jeopardise repayment
• Debt structure: conclude on appropriateness of the facilities, assess the level of protection and critique the pricing to assess the risk: return

SECTORS IN DISTRESS

Key macro economic and sector trends, which are likely to erode creditworthiness:

• Using a structured approach to understanding a sector
• Uncover market sentiment: identify which sectors currently trade wider than others
• Criteria for successful players in the sector and indicators of vulnerable companies
• Identify market trends and sector impact on key cash-flow drivers: operating profits, working capital levels and capex requirements
• Benchmark performance and interpret peer information
• The challenge of regulated industries: is management geared up to deal with changes in the regulatory environment?
• Contagion risk and early warning signals
• How to anticipate sector collapse: the next distressed sectors

COMMERCIAL VIABILITYOperating and investment activities

This section will focus on companies with broken business models and companies in crisis. It will also examine challenges facing capital intensive companies:

• Business risk: uncertainty of cash-flow profits over time
• Business model and measuring its success: earnings and cash-flow indicators
• Risk of lending to companies which are reinventing themselves
• Sector and the business drivers of capex and RandD investments
• Lending to companies with in-house finance operations: vendor finance and securitization

Management and shareholders

This section will focus on comparing management responses to a challenged sector:

• Companies in crisis: attributable to poor strategy or operational inefficiencies?
• How to recognise weak management
• Unravelling risks associated with complex group structures and dominant shareholders
• Companies with limited disclosure: when is transparency insufficient?

FINANCIAL RISK

This section will focus on the appropriateness of a company's funding structure in light of its business risks and financial goals:

• Assessing the appropriateness of the capital structure: amount and structure of the debt
• Evaluating financial risk indicators and comparing against peers
• Understand a company’s financial strategy: ratings targets and shareholder value
• Quantifying liquidity and financial flexibility
• Anticipate refinancing risk, considering long term debt run-off and payment readiness
• Assess corporate treasury objectives: tenor matching, funding and liquidity needs
• Heightened financial risk due to off balance sheet obligations, such as operating leases, selling assets with recourse, put options, pensions and post retirement health benefits
• Evaluating other sources of repayment: asset disposals and market value of these assets
• Lending against large cash balances
• Forecasting debt servicing: explicit and reasonable assumptions
• Companies with limited access to the equity market: debt and equity in conflict
• Companies which grow rapidly using debt financed acquisitions

CRITIQUING THE DEBT STRUCTURE

This section will go into the strengths and weaknesses of debt and bond structures:

• Purpose: who is the borrower? Where does the debt rank against other obligations? Is the debt profile in line with the needs and the risk?
• What protection has been negotiated; strong and weak forms of protection
• Covenants as a way to monitor the credit standing of a customer
• The need to be proactive in protecting the portfolio
• Alternative actions once credit deterioration is feared
• Conclusion: is the bank/investor adequately protected against credit deterioration.