Day 2 - Debt Capital Markets

Day 2 am - Debt & DCM Part 1 (2.5 hours)

We will spend 2 sessions on debt as the challenges are the variety of debt and bond maths.  In this first section, we will start by taking a look at the time value of money, through government and the wholesale (LIBOR and mid-swap) yield curves to explain the base cost of money over time.  The aim is to understand the foundation of the cost of debt, and its dependence on debt maturity.  However, we will also explore re-financing risk through the homework case study. 

Key topics:

• Bond maths including present and future valuing, rates and yields
• Government yield curve
• LIBOR and the wholesale yield curve (LIBOR and mid-swap)
• Bonds, characteristics
• Debt maturity profile and assessing re-financing risk

Day 2 am & pm - Credit analysis (2.5 hours)

In this day, the analysts will go through the steps of credit risk assessment, shadowing the rating agencies Moody’s and S&P’s methodology. We will explain key risk factors, both qualitative and quantitative. We will focus on key credit ratios and cash flow calculations.  

Key topics:

• Profitability and cash generation
• Working capital, capex: sources vs uses of funds
• Cash flow statement focusing on key stages, including Funds from operations, Free operating cash flow, Discretionary cash flow
• Financial leverage and operational leverage
• Senior vs subordination (legal)
• Key credit ratios including: Debt coverage, interest coverage, asset coverage
• Re-financing risk and creditor relations
• Business strategy, management, and impact on credit risk

Day 2 pm - Debt & DCM Part 2 (2 hours)

This is the second part of the debt section, focusing on credit premium and corporate debt products.  We will explore a company’s specific risk (credit risk) and the required risk premium over and above the base time value of money as the company’s cost of debt. 

We will explore the classic debt securities, commercial paper and bonds. We will look at standalone bonds vs issuances under a note programme. We will look at bond agreements and terms and conditions. We will look at the bond placement process.

We will discuss the bank debt market, focusing on revolving credit facility and term loans, focusing on investment-grade debt at this point). We will contrast bond documents with loan documents, particularly on any differentiation in terms and conditions. We will look at the loan syndication process.

We will conclude by looking at other types of debt products, including structured finance.

Key topics:

• Credit spread and cost of debt
• Commercial paper 
• Bonds, bond placements, and bond documents 
• Bank debt including Revolving credit facility, Term loans
• Credit facility agreement
• Loan syndication process
• Debt terms and conditions including financial covenants

We will conclude DCM day with a wrap-up case study

Key case study:

Financing strategy, quantitative and qualitative considerations in debt financing, cost of debt based on yield curve and re-refinancing risk.  Case study to be based around the program case company

Case assignment description:

• Kellogg’s short-term debt:  25% of total debt
• Suppose Kellogg’s intends to replace 15% of its ST debt with longer-dated debt