Opening Credit

Introduction: Credit: An Insider's View?
- For whom is this book intended?
- Objectives of this Book
- Credit Analysis - The Gulf between Theory and Practice
- What's the Matter with Traditional Credit Analysis as a Means of Making Money?
- Prediction is Very Difficult, Especially About the Future

I. Management and Governance. A Qualitative Overlay to Investment Decisions

- Why does this matter?
- The Nature of the Corporation
- A Fundamental Ambiguity
- The Corporation as a Legal Conceit
- The Relationship between Senior Management and Corporate Identity
- Good Credit Analysis Examines the C-Suite
- Agency Outweighs Ownership
- Alternative Ownership Models - Nothing's Perfect
- Ownership is too Atomised to Exert Control
- A Fundamental Change in the Power Dynamic
- Regulatory Response
- So Far, Largely Ineffectual
- SarbOx - A Tentative Incursion into the Field
- Regulatory Codes
- Focus of Regulatory Responses
- Regulation Likely to Remain Behind the Curve
- Tying these Themes Together from a Credit Perspective

II. Management and Governance Case Studies

- Case Study I: Chesapeake Energy Corp.
- Background
- Changes to the Board
- Boardroom Relationships Hinted at Risk Appetite
- Case Study II. The Royal Bank of Scotland Group plc
- The Shortcomings of Corporate Grandees
- Another Dense Social Network
- Think Global. Hire Local
- Testing the Limits of Compartmentalisation
- Key Governance Conclusions for Credit Assessment
- Separation of Responsibilities
- Remuneration Structures
- Remuneration: Another Yellow Flag
- Board Memberships: Independence and Expertise
- Qualitative Investigation
- Governance: A Crucial Supplement to the Financial Model

III. Traditional Credit Analysis. A Framework for Relative Value

- Overview of the discipline
- 1. Economic Context
- 2. Sovereign Risk
- 3. Company Scale & Cyclicality
- 4. Maturity and Growth Prospects
- 5. Obsolescence and Substitution
- 6. Capital, Asset and Labour Intensity
- 7. Numbers Focus - Key Touchstones of Creditworthininess
- 8. Cash Cycle and Seasonality
- 9. Growth, Margin and Capital Formation
- 10. Shareholders and Shareholder Activism
- 11. Quantitative, Market-based Credit Systems
- 12. Disclosure
- 13. Relative Positioning on a Scale of Creditworthiness

IV. How Managements Present Reality

1) Introduction
- Reducing Credit to a Numbers Game
- "Soft" Factors Can Predominate
- But Numbers Can Still be Revealing

2) Manipulation of the Income Statement
- Application of Management Discretion
- Revenue and Expense Recognition
- Revenue Recognition Red Flags
- Growth of "Other" Assets
- Changing Revenue Recognition Timings
- Other Forms of Revenue Manipulation

3) Depreciation policy
- Conventional Presentation
- Depreciation Policy Abuse
- Waste Management Inc. Garbage in, Garbage Out

4) Capitalisation of Income Statement Items
- M&A Smokescreen
- Royal Ahold

5) Auditors
- Madoff
- Olympus

6) Balance Sheet Analysis
- Inventory Valuation
- Nicor Inc
- Fixed Asset Revaluation
- China Forestry
- First Energy

7) Cash Flow Analysis
- Receivables Sales and Securitisation
- Meritor Inc.
- Leases : Capital vs. Operating
- Cashflow from Asset Churning
- Melia S.A.
- Cash Flow from Goodwill Impairment
- Caterpillar Inc.
- Conclusion

V. Behind the Numbers

- Adjusted Debt, Liquidity and Non-Credit Factors
- Introduction

I. Adjustments for off-Balance Sheet Liabilities
- Pension Deficits and OPEBs
- Leases
- Case Study: Leases. There's No Place Like Home
- From Adjusted Debt to Adjusted Leverage

II. Event Risk
- Case Study: BP and the Macondo Oil Spill

III. Liquidity Analysis
- Case Study I: The Goodyear Tire & Rubber Company
- Case Study II: Clear Channel Communications

IV. Analysis of Non-Credit Factors that Drive Credit
- LBO Case Study I: VNU/Nielsen
- LBO Case Study II: TXU. Take a Walk on the Wilder Side

VI. How Market Considerations Drive Credit

- Why sound fundamental analysis may not make you a penny
- Credit Markets are Large but Illiquid
- Credit Default Swaps (CDS)
- Market Impact of CDOs and CLOs
- The Role of the Ratings Agencies
- Case Study - Lafarge S.A.
- Indexation and Total Return Investing
- New Issues
- Turning Analysis into Alpha
- Instruments available to the Credit Investor
- Relative Value Investing
- Predicting the Default Horizon
- Case Study - Aiful Corporation
- Conclusions

And Finally