A Pragmatist's Guide to Leveraged Finance Credit Analysis for Bonds and Bank Debt

by Kricheff, Robert S.

• ISBN13: 9780132855235
• ISBN10: 0132855232
• Edition: 1st
• Format: Hardcover
• Copyright: 2012-02-24
• Publisher: FT Press

Summary

The high-yield leveraged bond and loan market ( ;junk bonds ;) is now valued at $3+ trillion in North America, ¬1 trillion in Europe, and another $1 trillion in emerging markets. What's more, based on the maturity schedules of current debt, it's poised for massive growth. To successfully issue, evaluate, and invest in high-yield debt, however, financial professionals need credit and bond analysis skills specific to these instruments. Now, for the first time, there's a complete, practical, and expert tutorial and workbook covering all facets of modern leveraged finance analysis. In A Pragmatist's Guide to Leveraged Finance,Credit Suisse managing director Bob Kricheff explains why conventional analysis techniques are inadequate for leveraged instruments, clearly defines the unique challenges sellers and buyers face, walks step-by-step through deriving essential data for pricing and decision-making, and demonstrates how to apply it. Using practical examples, sample documents, Excel worksheets, and graphs, Kricheff covers all this, and much more: yields, spreads, and total return; ratio analysis of liquidity and asset value; business trend analysis; modeling and scenarios; potential interest rate impacts; evaluating and potentially escaping leveraged finance covenants; how to assess equity (and why it matters); investing on news and events; early stage credit; and creating accurate credit snapshots. This book is an indispensable resource for all investment and underwriting professionals, money managers, consultants, accountants, advisors, and lawyers working in leveraged finance. In fact, it teaches credit analysis skills that will be valuable in analyzing a wide variety of higher-risk investments, including growth stocks.

Author Biography

Robert S. Kricheff, Managing Director and Head of the Americas High Yield Sector Strategy for Credit Suisse, has more than 20 years of experience in credit analysis. He has followed industries including media, cable, satellite, telecom, gaming, entertainment, healthcare, and energy; worked with emerging market corporates; and performed both strategy and portfolio analysis. His work has covered investment vehicles including bonds, converts, loans, preferred stocks, and credit default swaps. He holds a BA from New York University in Economics, and an MS c from the University of London SOAS in Financial Economics.

Table of Contents

Introduction	p. 1
Common Leveraged Finance Terms	p. 7
General Terms	p. 7
Yield and Spread Definitions	p. 11
Questions	p. 14
Defining the Market and the Ratings Agencies	p. 17
The Participants	p. 21
The Issuers	p. 21
The Sell Side	p. 22
The Buy Side	p. 23
Private Equity	p. 25
Why Is Leveraged Finance Analysis Unique?	p. 27
The Major Components of Analysis	p. 31
The Components	p. 32
A Pragmatic Point on the Various Aspects of Analysis	p. 34
Some Features of Bank Loans	p. 35
Questions	p. 40
A Primer on Prices, Yields, and Spreads	p. 41
The Basics	p. 41
A Few Points on Yields	p. 43
A Few Points on Spreads	p. 43
Bank Loan Coupons	p. 44
Duration	p. 45
Total Returns	p. 45
Deferred Payment Bonds: Prices and Yields	p. 46
A Pragmatic Point on Terminology	p. 48
Questions	p. 49
A Primer on Key Points of Financial Statement Analysis	p. 51
EBITDA	p. 52
Capital Expenditures	p. 57
Interest Expenses	p. 58
Taxes	p. 59
Changes in Working Capital	p. 59
Free Cash Flow	p. 61
The Balance Sheet	p. 62
A Pragmatic Point on Financial Statements	p. 64
Questions	p. 65
Credit Ratios	p. 67
EBITDA/Interest Ratio	p. 69
Debt/EBITDA	p. 72
A Pragmatic Point on the Leverage Ratio	p. 76
A Pragmatic Point on Valuations	p. 77
Free Cash Flow Ratios	p. 79
Changes in Working Capital	p. 80
Dividends	p. 80
Acquisitions	p. 80
One-Time Charges	p. 81
The FCF/Debt Ratio	p. 82
A Pragmatic Point on Free Cash Flow	p. 82
Questions	p. 84
Business Trend Analysis and Operational Ratios	p. 85
Business Trends	p. 86
Margins and Expenses	p. 88
Capital Expenditures	p. 91
Questions	p. 93
Expectations, Modeling, and Scenarios	p. 95
Sales and Revenue	p. 96
A Full Model	p. 99
Scenarios	p. 108
A Pragmatic Point on Bank Maintenance Covenants and Expectations	p. 110
Questions	p. 112
Structural Issues: Coupons	p. 113
Loan Coupons	p. 113
Bond Coupons	p. 115
Zero and Zero-Step Coupons	p. 115
How the Coupon Is Determined	p. 121
Modeling Changes in Coupons	p. 122
Questions	p. 123
Structural Issues: Maturities, Calls, and Puts	p. 125
Maturities	p. 125
Calls	p. 126
Clawback	p. 129
10% Call	p. 130
Cash Flow Sweeps	p. 131
AHYDO	p. 132
Other Bank Prepayments	p. 132
Open-Market Repurchases	p. 133
A Pragmatic Point on Early Refinancing of Debt	p. 134
Questions	p. 136
Structural Issues: Ranking of Debt	p. 137
Ranking	p. 138
Structural Subordination	p. 141
Subsidiary Guarantees	p. 145
Questions	p. 148
Key Leveraged Finance Covenants	p. 149
Debt Incurrence	p. 151
Defined Terms and Carve-outs	p. 153
Defined Term Examples	p. 154
Carve-outs	p. 155
Restricted Payments	p. 156
Change of Control	p. 158
Asset Sale	p. 160
Reporting Requirements	p. 161
Other Covenants	p. 162
Affirmative/Maintenance Covenants	p. 163
Restricted and Unrestricted Groups	p. 165
Questions	p. 167
Amendments, Waivers, and Consents	p. 169
Questions	p. 177
Making Money or Losing It Off of News Events	p. 179
Scenario: An Issuer Makes an Acquisition	p. 180
FastFoodCo (FFC) Facts	p. 180
GoodFoodCo (GFC) Facts	p. 181
Deal Facts	p. 181
Scenario: The Issuer Gets Bought	p. 185
Scenario: An Issuer Announces an IPO	p. 189
Scenario: An Issuer Is Facing a Maturity	p. 192
A Pragmatic Point on the Blended Price to Retire Debt	p. 194
Questions	p. 195
Management and Ownership	p. 197
I'm Looking at Debt, So Why Does Equity Matter?	p. 201
Valuation	p. 201
Monitoring Equities	p. 206
Questions	p. 208
Value, Relative Value, and Comparable Analysis	p. 209
Questions	p. 216
New Issuance	p. 217
Distressed Credits, Bankruptcy, and Distressed Exchanges	p. 221
Claims	p. 224
Classes of Claims	p. 226
Subordination	p. 227
Claims Arising from Bankruptcy	p. 229
Valuing the Enterprise	p. 230
Sale or Restructuring	p. 231
Restructuring Without Bankruptcy	p. 234
A Few Pragmatic Points on Bankruptcy Reorganizations	p. 236
Questions	p. 238
Preparing a Credit Snapshot	p. 239
The Investment Decision Process	p. 243
A Sample Investment Process	p. 244
Big-Picture Items	p. 245
The Company	p. 245
Credit Fundamentals	p. 246
Event Analysis	p. 246
Security Analysis	p. 247
Relative Value and Return	p. 247
The Decision	p. 247
Some Investment Traps	p. 248
Closing Comments	p. 251
Answers	p. 253
Index	p. 259
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