Corporate Analysis and Credit

Corporate analysis is often used for credit analysis but it can also be used for other reasons. Corporate credit analysis is really a combination of financial and strategic analysis, the principles of credit and financial structuring.

Financial and strategic analysis

Corporate credit is more than just financial and strategic analysis, although this is the natural foundation of credit analysis. In some courses the emphasis can be on understanding the basic measures of analysis. In others the level can be raised to incorporate newer, or more sophisticated measures. The principles are the same whatever the level of analysis: forming a coherent picture of the performance of a business. Rather than report on a case study company by listing ratios, delegates are encouraged to describe overall performance by reference to a relatively small number of measures. Regarding strategic analysis, emphasis is on when each of the models is appropriate for use rather than using many models for the sake of it. The real value is in combining financial and strategic analysis to form an overall view of future performance. Credit analysis is, after all, trying to form a view on future ability to service and repay debt.

Whether basic level or more advanced, cash flow will always feature as a part of the analysis.

Financial structuring

This is the technique of constructing a portfolio of debt that satisfies both the risk constraints of the lender and the varied objectives of the borrower. The basics concern the principles of lending and the risk/return characteristics of different form of finance. The technique is vital in all areas of corporate lending but it comes to the fore particularly in the context of project finance and acquisition finance. Here, the cash flows are typically quite tight and some innovation may be required to produce a financial structure which can satisfy the requirements of the various parties. The ground rules are basic to corporate finance and corporate treasury; applying the rules enables an efficient structure to be found.

Credit protection/documentation

Credit analysis is intended to identify key areas of risk. The next step in credit protection is negotiating the terms of the debt in order to offset those risks. This is a core part of credit – how to use the analysis to structure a set of terms which are acceptable both to the borrower and the lender. The knowledge requirement here is to understand the purpose of the various clauses in the documentation and how they can be used to manage credit risk. There may be no conflict between the structuring needs of the corporate client (addressed under corporate treasury) and those of the lender. However, when conflicts do arise it is necessary to be clear on the trade-off between accepting the borrowing and accepting the risk implicit in that borrowing.

Equity analysis

This is an alternative outcome of financial and strategic analysis. Here the emphasis is less on an ability to service and repay debt and more on longer-term potential for growth in both profitability and dividends. More attention is paid to the profit and loss account than the balance sheet; the measures used reflect this. Traditional measures and the newer measures are used and discussed.