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

By Robert S. Kricheff

Published by FT Press

Published Date: Feb 24, 2012

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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

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

Purchase Info

ISBN-10: 0-13-285526-7

ISBN-13: 978-0-13-285526-6

Format: Safari PTG

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