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


The First Practical Guide to Credit Analysis for Today’s $3,500,000,000,000+ High-Yield Leveraged Bond and Loan Markets

“The author applies his vast market experience to detail the underlying tenets of credit analysis in a user-friendly fashion. This is certain to become...

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

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The First Practical Guide to Credit Analysis for Today’s $3,500,000,000,000+ High-Yield Leveraged Bond and Loan Markets

“The author applies his vast market experience to detail the underlying tenets of credit analysis in a user-friendly fashion. This is certain to become the ‘go to’ book for all participants in the leveraged finance market!”

Pat Dyson, Managing Director, UBS O’Connor

“Bob Kricheff’s extensive experience in leveraged finance makes him the perfect person to write what is a very helpful and easy-to-use book on credit analysis. He blends the technical aspects, along with the practical, to provide the reader with a thorough understanding of how analysts do their jobs.”

Terrence J. Mullen, CFA, Group Head of Public Research, Allstate Investments, LLC

“This book belongs on the bookshelf of anyone engaged in or considering investing in leveraged finance. It is a must-read for new analysts on the buy side and the sell side of the high yield marketplace. I cannot think of anyone, other than Bob, who is better positioned with deep knowledge and professional experience to pen this book.”

Linda Carter, Portfolio Manager and Vice President, Eaton Vance Investment Managers

“Bob has been involved in a variety of roles in the high yield market since the market’s infancy in the 1980s. This book is an excellent resource for beginners who are trying to learn the intricacies of the high yield market as well as for experienced professionals looking to refine their credit skills. I found the book well written and I highly recommend it.”

Richard J. Lindquist, Managing Director, Morgan Stanley Investment Management

The high-yield, leveraged bond and loan market now exceeds $2.3 trillion in North America, €650 billion in Europe, and another $600 billion in emerging markets—and it’s growing fast. This market combines aspects of conventional fixed income markets, the event-driven volatility typically associated with equities, and structural features present nowhere else. To succeed in this market, you need credit analysis skills and insights specifically designed for it. Now, for the first time, there’s a complete practical guide to performing this analysis.

Credit Suisse high-yield specialist Robert S. Kricheff focuses on how financial professionals actually prepare and use leveraged finance credit analysis, offering examples addressing diverse scenarios and a wide spectrum of credit risks, from companies near-investment-grade to firms in bankruptcy. He illuminates credit analysis as a dynamic process, shows how to evaluate both financial liquidity and asset protection, demonstrates how to use the field’s key tools, and explains how to apply the insights that make analysis an art, not just a science.

• Projecting liquidity

Will sufficient cash be generated to pay interest and principal?

• Evaluating assets

Can the investor be protected by the value of underlying assets?

• Applying financial ratios and metrics

How can credit quality be analyzed and investment options compared?

• Evaluating management and ownership

Can the company leaders deliver what they promise?

• Investing on breaking news

How can you profit from the junk bond market’s volatility?

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Product Details

  • ISBN-13: 9780132855235
  • Publisher: FT Press
  • Publication date: 3/9/2012
  • Series: Applied Corporate Finance Series
  • Edition description: New Edition
  • Edition number: 1
  • Pages: 288
  • Product dimensions: 6.10 (w) x 9.10 (h) x 1.30 (d)

Meet the Author

Robert S. Kricheff, Managing Director and Head of the Americas High Yield Sector Strategy for Credit Suisse, has more than 20 years of experience in credit analysis. He has followed industries including media, cable, satellite, telecom, gaming, entertainment, healthcare, and energy; worked with emerging market corporates; and performed both strategy and portfolio analysis. His work has covered investment vehicles including bonds, converts, loans, preferred stocks, and credit default swaps. He holds a BA from New York University in Economics, and an MS c from the University of London SOAS in Financial Economics.

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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


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


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

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