Synopses & Reviews
The First Practical Guide to Credit Analysis for Today’s $3,500,000,000,000+ High-Yield Leveraged Bond and Loan Markets
“The author applies his vast market experience to detail the underlying tenets of credit analysis in a user-friendly fashion. This is certain to become the ‘go to’ book for all participants in the leveraged finance market!”
—Pat Dyson, Managing Director, UBS O’Connor
“Bob Kricheff’s extensive experience in leveraged finance makes him the perfect person to write what is a very helpful and easy-to-use book on credit analysis. He blends the technical aspects, along with the practical, to provide the reader with a thorough understanding of how analysts do their jobs.”
—Terrence J. Mullen, CFA, Group Head of Public Research, Allstate Investments, LLC
“This book belongs on the bookshelf of anyone engaged in or considering investing in leveraged finance. It is a must-read for new analysts on the buy side and the sell side of the high yield marketplace. I cannot think of anyone, other than Bob, who is better positioned with deep knowledge and professional experience to pen this book.”
—Linda Carter, Portfolio Manager and Vice President, Eaton Vance Investment Managers
“Bob has been involved in a variety of roles in the high yield market since the market’s infancy in the 1980s. This book is an excellent resource for beginners who are trying to learn the intricacies of the high yield market as well as for experienced professionals looking to refine their credit skills. I found the book well written and I highly recommend it.”
—Richard J. Lindquist, Managing Director, Morgan Stanley Investment Management
The high-yield, leveraged bond and loan market now exceeds $2.3 trillion in North America, €650 billion in Europe, and another $600 billion in emerging markets—and it’s growing fast. This market combines aspects of conventional fixed income markets, the event-driven volatility typically associated with equities, and structural features present nowhere else. To succeed in this market, you need credit analysis skills and insights specifically designed for it. Now, for the first time, there’s a complete practical guide to performing this analysis.
Credit Suisse high-yield specialist Robert S. Kricheff focuses on how financial professionals actually prepare and use leveraged finance credit analysis, offering examples addressing diverse scenarios and a wide spectrum of credit risks, from companies near-investment-grade to firms in bankruptcy. He illuminates credit analysis as a dynamic process, shows how to evaluate both financial liquidity and asset protection, demonstrates how to use the field’s key tools, and explains how to apply the insights that make analysis an art, not just a science.
• Projecting liquidity
Will sufficient cash be generated to pay interest and principal?
• Evaluating assets
Can the investor be protected by the value of underlying assets?
• Applying financial ratios and metrics
How can credit quality be analyzed and investment options compared?
• Evaluating management and ownership
Can the company leaders deliver what they promise?
• Investing on breaking news
How can you profit from the junk bond market’s volatility?
Synopsis
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.
About the Author
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
Chapter 1 Introduction 1
Chapter 2 Common Leveraged Finance Terms 7
General Terms 7
Yield and Spread Definitions 11
Questions 14
Chapter 3 Defining the Market and the Ratings Agencies 17
Chapter 4 The Participants 21
The Issuers 21
The Sell Side 22
The Buy Side 23
Private Equity 25
Chapter 5 Why Is Leveraged Finance Analysis Unique? 27
Chapter 6 The Major Components of Analysis 31
The Components 32
A Pragmatic Point on the Various Aspects of Analysis 34
Chapter 7 Some Features of Bank Loans 35
Questions 40
Chapter 8 A Primer on Prices, Yields, and Spreads 41
The Basics 41
A Few Points on Yields 43
A Few Points on Spreads 43
Bank Loan Coupons 44
Duration 45
Total Returns 45
Deferred Payment Bonds: Prices and Yields 46
A Pragmatic Point on Terminology 48
Questions 49
Chapter 9 A Primer on Key Points of Financial
Statement Analysis 51
EBITDA 52
Capital Expenditures 57
Interest Expenses 58
Taxes 59
Changes in Working Capital 59
Free Cash Flow 61
The Balance Sheet 62
A Pragmatic Point on Financial Statements 64
Questions 65
Chapter 10 Credit Ratios 67
EBITDA/Interest Ratio 69
Debt/EBITDA 72
A Pragmatic Point on the Leverage Ratio 76
A Pragmatic Point on Valuations 77
Free Cash Flow Ratios 79
Changes in Working Capital 80
Dividends 80
Acquisitions 80
One-Time Charges 81
The FCF/Debt Ratio 82
A Pragmatic Point on Free Cash Flow 82
Questions 84
Chapter 11 Business Trend Analysis and Operational Ratios 85
Business Trends 86
Margins and Expenses 88
Capital Expenditures 91
Questions 93
Chapter 12 Expectations, Modeling, and Scenarios 95
Sales and Revenue 96
A Full Model 99
Scenarios 108
A Pragmatic Point on Bank Maintenance Covenants and Expectations 110
Questions 112
Chapter 13 Structural Issues: Coupons 113
Loan Coupons 113
Bond Coupons 115
Zero and Zero-Step Coupons 115
How the Coupon Is Determined 121
Modeling Changes in Coupons 122
Questions 123
Chapter 14 Structural Issues: Maturities, Calls, and Puts 125
Maturities 125
Calls 126
Clawback 129
10% Call 130
Cash Flow Sweeps 131
AHYDO 132
Other Bank Prepayments 132
Open-Market Repurchases 133
A Pragmatic Point on Early Refinancing of Debt 134
Questions 136
Chapter 15 Structural Issues: Ranking of Debt 137
Ranking 138
Structural Subordination 141
Subsidiary Guarantees 145
Questions 148
Chapter 16 Key Leveraged Finance Covenants 149
Debt Incurrence 151
Defined Terms and Carve-outs 153
Defined Term Examples 154
Carve-outs 155
Restricted Payments 156
Change of Control 158
Asset Sale 160
Reporting Requirements 161
Other Covenants 162
Affirmative/Maintenance Covenants 163
Restricted and Unrestricted Groups 165
Questions 167
Chapter 17 Amendments, Waivers, and Consents 169
Questions 177
Chapter 18 Making Money or Losing It Off of News Events 179
Scenario: An Issuer Makes an Acquisition 180
FastFoodCo (FFC) Facts 180
GoodFoodCo (GFC) Facts 181
Deal Facts 181
Scenario: The Issuer Gets Bought 185
Scenario: An Issuer Announces an IPO 189
Scenario: An Issuer Is Facing a Maturity 192
A Pragmatic Point on the Blended Price to Retire Debt 194
Questions 195
Chapter 19 Management and Ownership 197
Chapter 20 I’m Looking at Debt, So Why Does Equity Matter 201
Valuation 201
Monitoring Equities 206
Questions 208
Chapter 21 Value, Relative Value, and Comparable Analysis 209
Questions 216
Chapter 22 New Issuance 217
Chapter 23 Distressed Credits, Bankruptcy, and Distressed
Exchanges 221
Claims 224
Classes of Claims 226
Subordination 227
Claims Arising from Bankruptcy 229
Valuing the Enterprise 230
Sale or Restructuring 231
Restructuring Without Bankruptcy 234
A Few Pragmatic Points on Bankruptcy Reorganizations 236
Questions 238
Chapter 24 Preparing a Credit Snapshot 239
Chapter 25 The Investment Decision Process 243
A Sample Investment Process 244
Big-Picture Items 245
The Company 245
Credit Fundamentals 246
Event Analysis 246
Security Analysis 247
Relative Value and Return 247
The Decision 247
Some Investment Traps 248
Chapter 26 Closing Comments 251
Answers 253
Index 259