CREDIT RISK MANAGEMENT 3

ADVANCED CREDIT RISK MANAGEMENT AND BEST LENDING PRACTICES.

ADVANCED CREDIT RISK MANAGEMENT  SEMINAR & BEST LENDING PRACTICES

 PHIL H. LATIMIER, Ph.D.

  • SESSION # 11.
  • Session 1  : What is Credit?
  • Who uses it and why
  • Review of recent high profile defaults – some common themes
  • Review of credit market:
  • Where we are in the credit cycle?
  • Overview of default and recovery rates
  • Warm-up case: Review the risk sections of bank annual reports.

 

  • Session 2 : Rating agencies vs. bank credit analysis.
  • Overview of rating agency approach and definitions: differences in outlook and why
  • Definitions of default, banks vs. rating agencies vs. derivatives market
  • Warm-up case: What are the key factors that would enable a company to make the jump from sub-investment grade to investment grade?

 

  • Session 3 : How do companies fund themselves?
  • The risk return profile
  • Financial Leverage, Operating Leverage, Total Leverage and Borrowing Capacity
  • Short, medium and long term debt products from the banking and capital markets
  • Which products are appropriate for which purposes and why?
  • Asset based, seasonal and cash flow lending
  • Warm-up case: For each borrowing need, identify the appropriate product or products

 

  • Session 4 : Preliminary screening : What is the request?
  • Identify the proposed loan terms
  • Quick and dirty – purpose and payback
  • Use of risk rating models
  • Minimum RAROC for account profitability
  • SESSION # 12.
  • Session 1 : Industry and Corporate Strategy
  • Using established industry and business analysis techniques from the credit perspective
  • SWOT, Porter
  • Company overview: History, organizational structure, product lines, customer base, suppliers, market position, management and overall strategy.

Exercise:  Compare and contrast the case companies – which appear to have the strongest industry fundamentals?

Exercise: Business and Industry Analysis Techniques

  • Session 2 : Historical financial statement analysis :
  • Measuring performance and risk
  • Income statement
  • Balance sheet
  •  Working investment

Warm-Up Exercise: The mixed up balance sheet

  • Ratio analysis techniques
  • Profitability
  • Efficiency
  • Performance
  • Liquidity
  • Capital structure
  • Coverage
  • Limitation of ratios 

Warm – Up Exercise: Participants calculate key ratios for the case companies

  • Session 3 :Cash flow analysis
  • Creating and interpreting cash flows
  • Differences between company produced and derived cash flows
  • Analysis of cash drivers
  • Operating cash flow, net operating cash flow, EBITDA: when and how to use the different measures.

Warm-Up Exercise: Profit versus cash flow

  • Pitfalls of EBITDA
  • Working capital analysis
  • Capex analysis (maintenance vs. growth)
  • Complications of analyzing cash flows

Warm-Up Exercise: Calculate a simple cash flow statement

  • SESSION # 13.
  • Session 1 : Loan structuring
  • Who is the borrower?
  • Facility structure
  • Corporate structure
  • Seniority
  • Structural subordination

Warm-UP Exercise: Loan structuring

  • Session 2 : Industry and company forecasting
  • Projection analysis
  • Introduction to the model
  • Key factors driving forecast statements
  • Overview of model forecast inputs
  • Calculating debt capacity form projected cash flows
  • Compare debt capacity to credit request
  • Alternative sources of repayment

Case  Study :  Participants use the model to forecast base and downside cases as well as assess sustainable debt capacity

  • Session 3 : The challenge of covenants
  • Financial covenants
  • Non-financial covenants
  • Setting covenants – at what level
  • Covenant tracking – when to see the client

Warm – Up Exercise – setting covenants for Cy  X

  • Session 4 : Syndicated loans
  • Role of the players and the local market
  • Key benefits of syndicated loans
  • Loan syndication procedures
  • Documentation benefits and traps

 

  • SESSION # 14.
  • Session 1 : Early warning signs of corporate problems
  • Distress or disaster
  • Non-financial signs

Warm – Up Exercise:  Early Warning Signs Cie so and so.

  • Session 2 : Use of credit default models
  • Credit grades
  • Credit sights
  • Credit Watch

Warm – Up Exercise: Using market tools to spot potential signs of trouble

  • Session 3 : Where are we in the credit cycle?
  • The role of credit analysis & risk management
  • Volatility in the Market Place
  • Overview of default rates and bank write-off 

Warm – Up Exercise: Reviewing several banks annual report sections on risk 

  • Session 4 : The Rating Agencies
  • The rating agency approach – Rate through the cycle
  • Why rating agencies lag the debt and equity markets
  • The rating outlooks
  • The vicious circle – How rating downgrades can trigger liquidity crises
  • Analysis – the difference between the banks and rating agencies

Warm – Up Exercise:  The credit cliff

  • Session 5 : Causes of Decline – Industry and Corporate Analysis 
  • Utilizing a risk evaluation framework
  • Economic and Industry outlook
  • Company specific analysis
  • The Porter and Dupont Models
  • Review of Management

Warm – Up Exercise: Participants evaluate the Chairman’s letter from Cy so and so, prescribe the corporate outlook on it.

  •  SESSION # 15.
  • Session 1 : Fundamentals when Processing a Loan Request
  • The loan interview
  • Visit the Applicant’s Premises
  • Credit Investigations
  • Searching Public Records
  • Borrower’s Objectives and Loan Purpose
  • Counselling Borrowers
  • Effect of the Loan on the Business
  • Session 2 : Fundamentals when Making a Loan Decision
  • Financial Position
  • Repayment Capacity
  • Secured or Unsecured Loans
  • Analyzing Collateral Position
  • Collateral Valuations
  • Significance of Loan Purpose
  • Analyzing a Renewal Request
  • Making a Loan Decision
  • Making a Loan Presentation
  • Session 3 : Fundamentals when Structuring and Closing the Loan
  • Line of Credit Financing
  • Split Line Financing
  • Loan Agreements
  • Closing the Loan
  • Session 4 : Fundamentals when Pricing Loans
  • Money Market Conditions
  • Risk
  • Fixed Rate vs Adjustable Rate
  • Repayment Term
  • Compensating Balances
  • Operating and Overhead Costs
  • Competition
  • Loan Pricing Formulas
  • Session 5 : Legal Documentation
  • Promissory Notes
  • Setoff
  • Waiver Provisions
  • Acceleration Provision
  • Default Provisions
  • Cognovit Clause
  • Dealing with Co-Obligors
  • Loan Guaranty Agreements
  • Hypothetication and Subordination Agreements
  • Collateral Assignments
  • Assignment of Life Insurance
  • Session 6 : Dealing with the Problem Loan
  • Dangers Signals
  • Delinquency
  • Adverse Trends
  • Fraudulent Information
  • Loss of Debtor Cooperation
  • Disappearnce or Depreciation of Collateral
  • Other Factors
  • Techniques for Early Identification
  • Determining the Magnitude of the Problem
  • Identififying the Cause of the Problem
  • Supervision of the Problem Loan
  • A plan for Correction
  • Additional Collateral or Sale of Assets
  • Extensions and Renewals
  • Analysis of the Results
  • Collecting the Problem Loan
  • Session 7 : Collections and Bankruptcy
  • Jugments
  • Repossession of Collateral
  • Replevin
  • Resale of Collateral
  • Bankruptcy
  • Liquidation
  • Redemption and Reaffirmation
  • The Restructuring Plan
  • Priority of Claims
  • Nondischargeable Debts

 

  • FINAL REVIEW AND COMPREHENSIVE CASE STUDY.

PHLDUCX

 

 

 

 

 

 

 

 


 [JB1]