Framework for Credit Analysis

• Components of credit analysis: assessment of management, analysis of a company's ability to repay and protection for the lender; collateral and covenants

Risks to the Business

• Macro factors: political, economic, environmental and demographic
• Industry factors, e.g.: Growth trends, exposure to economic cycles, barriers to entry and regulation
• Corporate specific risks, e.g.: Product/geographic diversification, support levels, strength of major customers and suppliers

Tools for Evaluating Corporate Strategy

• PEST Analysis
• Product mission matrix
• Market life cycle
• Product portfolio matrix
• Porter's model of competition
• SWOT analysis

Analysis of the Financial Statements

• Accounting principles
• Overview of main differences between UK GAAP and IFRS
• Critical areas for review in the financial information
• Review of balance sheet and profit and loss account
• Off-balance sheet items
• Adjusting the accounts for analytical purposes
• Areas of flexibility in accounts, e.g.: Off-balance sheet financing, stock values, capitalisation of expenses and revenue recognition

Understanding the Business

• Interpretation through ratio analysis
• Liquidity and the cash cycle
• Working investment as a measure of liquidity
• Identifying company dynamics

The Dynamics of Cash Flow

• Construction and format of cash flow statements
• Understanding and interpretation of cash flows
• Calculation of free cash flow
• Debt capacity

Forecasting

• Uses as a management tool
• Forecasting key assumptions
• Projection of the balance sheet and profit and loss account
• Forecasting cash flow
• Sensitivity analysis

Corporate Failure

• Identifying warning signs
• Reasons for corporate failure
• The critical role of management

Collateral Supporting the Debt

• Why take collateral?
• Priority of creditors' claims
• Insolvency law and how it affects lenders' rights

Covenants to Protect the Lender

• Affirmative/negative covenants
• Financial covenants

Structural subordination