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Opening Credit: A practitioner's guide to credit investment

Book Description

As a result of prevailing monetary conditions since the global financial crisis, the world has witnessed unprecedented growth in global corporate credit markets. Yet, despite the trillions of dollars put to work in the debt capital markets, corporate credit is still an unfamiliar concept to most investors compared to other asset classes, such as equities and commodities. Every red-top newspaper and 24-hour news service is happy to report the latest twitch in the Dow, FTSE or Stoxx indices but momentous moves in the iBoxx or iTraxx go unmentioned. And whereas many a talking head is happy to pose as an equity analyst, few feel comfortable venturing into the arcana of credit. Yet the corporate credit market, as the authors of this new book show, is both materially larger than its equity peer and has shown more attractive risk/reward characteristics over the last 90-odd years. In Opening Credit, career credit professionals, Justin McGowan and Duncan Sankey, aim to redress this by drawing on their more than 50 years' collective experience in the field to elucidate a practitioner’s approach to corporate credit investment. Whilst explaining the basics of traditional credit analysis and affirming its value, McGowan and Sankey also caution against its shortcomings. They demonstrate the need both to penetrate the veil of accounting to get to the economic reality behind the annuals and interim numbers and to analyse the individuals that drive them - the key executives and board members. They employ a range of cogent and easy-to-follow case studies to illustrate the value of their executive- and governance-led approach, which places management front and centre in understanding corporate credit. Opening Credit will appeal to all those seeking a better understanding of corporate credit, including analysts looking to develop their skills, fund managers (especially those with an eye to SRI), bankers, IFAs, financial journalists, academics and students of finance.

Table of Contents

  1. Contents
  2. About the Authors
  3. Preface
    1. What is this book about?
    2. What this book covers
  4. Introduction
    1. The case for corporate credit
    2. An asset class that has arrived
    3. Credit analysis – a gulf between theory and practice
    4. What is the matter with traditional credit analysis as a means of making money?
    5. Objectives of this book
  5. 1. Management and Governance: A Qualitative Overlay to Investment Decisions
    1. Introduction
    2. 1. The nature of the corporation
    3. 2. Ownership ≠ control
    4. 3. Regulatory response
    5. 4. Tying these themes together from a credit perspective
  6. 2. Management and Governance: Case Studies
    1. Case study I: Chesapeake Energy
    2. Case study II: Royal Bank of Scotland
    3. Management compensation and its influence on credit
    4. Management compensation case study I: Smithfield Foods
    5. Management compensation case study II: Sallie Mae
    6. Key governance conclusions for the credit investor
  7. 3. Traditional Credit Analysis: A Necessary Skill Set
    1. 1. Economic context
    2. 2. Sovereign risk
    3. 3. Company scale, cyclicality, elasticity of demand
    4. 4. Maturity and growth prospects of business
    5. 5. Obsolescence and substitution risk
    6. 6. Capital, asset and labour intensity
    7. 7. Numbers focus – key touchstones for creditworthiness
    8. 8. Cash cycle and seasonality
    9. 9. Growth, margin and capital formation
    10. 10. Shareholders and shareholder activism
    11. 11. Quantitative and market-based credit systems
    12. 12. Disclosure
    13. 13. Relative positioning on a scale of creditworthiness
    14. Conclusion
  8. 4. How Managements Present Reality
    1. Introduction
    2. 1. Reducing credit to a numbers game
    3. 2. Manipulation of the income statement
    4. Case study: Olympus
    5. 3. Manipulation of the balance sheet
    6. 4. Manipulation of the cash flow statement
    7. Conclusion
  9. 5. Behind the Numbers: Adjusted Debt and Liquidity
    1. Introduction
    2. 1. Adjustments for off-balance-sheet liabilities
    3. 2. Event risk
    4. 3. Liquidity analysis
  10. 6. How Non-Credit Factors Drive Credit
    1. LBO case study I: VNU/Nielsen
    2. M&A trends within the sector
    3. LBO case study II: TXU
    4. Conclusion
  11. 7. How Market Considerations Affect Credit
    1. 1. Why sound fundamental analysis may not make you a penny
    2. 2. The role of the credit ratings agencies
    3. 3. Indexation and absolute return investing
    4. 4. New issues – picking up pennies in front of a steamroller
    5. 5. Turning analysis into alpha
  12. Concluding Thoughts
  13. Publishing details