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

Book Description

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.

Table of Contents

  1. Title Page
  2. Copyright Page
  3. Dedication Page
  4. Contents
  5. Acknowledgments
  6. About the Author
  7. 1. Introduction
  8. 2. Common Leveraged Finance Terms
    1. General Terms
    2. Yield and Spread Definitions
    3. Questions
  9. 3. Defining the Market and the Ratings Agencies
  10. 4. The Participants
    1. The Issuers
    2. The Sell Side
    3. The Buy Side
    4. Private Equity
  11. 5. Why Is Leveraged Finance Analysis Unique?
  12. 6. The Major Components of Analysis
    1. The Components
    2. A Pragmatic Point on the Various Aspects of Analysis
  13. 7. Some Features of Bank Loans
    1. Questions
  14. 8. A Primer on Prices, Yields, and Spreads
    1. The Basics
    2. A Few Points on Yields
    3. A Few Points on Spreads
    4. Bank Loan Coupons
    5. Duration
    6. Total Returns
    7. Deferred Payment Bonds: Prices and Yields
    8. A Pragmatic Point on Terminology
    9. Questions
  15. 9. A Primer on Key Points of Financial Statement Analysis
    1. EBITDA
    2. Capital Expenditures
    3. Interest Expenses
    4. Taxes
    5. Changes in Working Capital
    6. Free Cash Flow
    7. The Balance Sheet
    8. A Pragmatic Point on Financial Statements
    9. Questions
  16. 10. Credit Ratios
    1. EBITDA/Interest Ratio
    2. Debt/EBITDA
    3. A Pragmatic Point on the Leverage Ratio
    4. A Pragmatic Point on Valuations
    5. Free Cash Flow Ratios
    6. Changes in Working Capital
    7. A Pragmatic Point on Free Cash Flow
    8. Questions
  17. 11. Business Trend Analysis and Operational Ratios
    1. Business Trends
    2. Margins and Expenses
    3. Capital Expenditures
    4. Questions
  18. 12. Expectations, Modeling, and Scenarios
    1. Sales and Revenue
    2. A Full Model
    3. Scenarios
    4. A Pragmatic Point on Bank Maintenance Covenants and Expectations
    5. Questions
  19. 13. Structural Issues: Coupons
    1. Loan Coupons
    2. Bond Coupons
    3. How the Coupon Is Determined
    4. Modeling Changes in Coupons
    5. Questions
  20. 14. Structural Issues: Maturities, Calls, and Puts
    1. Maturities
    2. Calls
    3. A Pragmatic Point on Early Refinancing of Debt
    4. Questions
  21. 15. Structural Issues: Ranking of Debt
    1. Ranking
    2. Structural Subordination
    3. Subsidiary Guarantees
    4. Questions
  22. 16. Key Leveraged Finance Covenants
    1. Debt Incurrence
    2. Defined Terms and Carve-outs
    3. Restricted Payments
    4. Change of Control
    5. Asset Sale
    6. Reporting Requirements
    7. Other Covenants
    8. Affirmative/Maintenance Covenants
    9. Restricted and Unrestricted Groups
    10. Questions
  23. 17. Amendments, Waivers, and Consents
    1. Questions
  24. 18. Making Money or Losing It Off of News Events
    1. Scenario: An Issuer Makes an Acquisition
    2. Scenario: The Issuer Gets Bought
    3. Scenario: An Issuer Announces an IPO
    4. Scenario: An Issuer Is Facing a Maturity
    5. A Pragmatic Point on the Blended Price to Retire Debt
    6. Questions
  25. 19. Management and Ownership
  26. 20. I’m Looking at Debt, So Why Does Equity Matter?
    1. Valuation
    2. Monitoring Equities
    3. Questions
  27. 21. Value, Relative Value, and Comparable Analysis
    1. Questions
  28. 22. New Issuance
  29. 23. Distressed Credits, Bankruptcy, and Distressed Exchanges
    1. Claims
    2. Classes of Claims
    3. Subordination
    4. Claims Arising from Bankruptcy
    5. Valuing the Enterprise
    6. Sale or Restructuring
    7. Restructuring Without Bankruptcy
    8. A Few Pragmatic Points on Bankruptcy Reorganizations
    9. Questions
  30. 24. Preparing a Credit Snapshot
  31. 25. The Investment Decision Process
    1. A Sample Investment Process
    2. Some Investment Traps
  32. 26. Closing Comments
  33. Answers
    1. Chapter 2
    2. Chapter 7
    3. Chapter 8
    4. Chapter 9
    5. Chapter 10
    6. Chapter 11
    7. Chapter 12
    8. Chapter 13
    9. Chapter 14
    10. Chapter 15
    11. Chapter 16
    12. Chapter 17
    13. Chapter 18
    14. Chapter 20
    15. Chapter 21
    16. Chapter 23
  34. Index
  35. FT Press