I have a Credit Analyst interview coming up with UMB bank next week. So far I can only think of questions about linking the 3 fin. stmts. together. What other questions can I expect? Does anyone have a Vault guide that touches on this? Do you know about the culture, company, etc.? Do you recommend any other resources? I still have a lot of research to do on them. Thanks all in advance!
bump, i am interested in this as well.
http://en.wikipedia.org/wiki/Credit_analysis Honestly I start with something like wiki for a broad overview when I interview for jobs. Then I drill down and click on the various hyperlinks to figure out the details. It works well to data mine all the various things a credit analyst will need to know. Company and culture is important, but the most important things you can do are let them know you work efficiently with minimal supervision and that you are eager to learn and assume responsibility. Vault would be good. Glassdoor is good as well.
Also look at common credit analysis ratio’s, such as, Debt to EBITDA, FCF to DEBT and EBIT to Interest. Understand covenants and loan/debt structure and how they protect the lender. Know what it means to be secured, unsecured and first lien/second lien etc. Understand Capital Structure and how it is important to the lender. Is this for Bank Debt or the Bond Market?
When I went through my interview, I had to do a case analysis. Basically you were given some info about this company and you have to make a case on why or why not you would lend to it. Ratios should certainly be covered in your analysis but don’t look at the big picture(SWOT analysis, Management, etc)
$tarving_Banker Wrote: ------------------------------------------------------- . Ratios should > certainly be covered in your analysis but don’t > look at the big picture(SWOT analysis, Management, > etc) Can you please explain why you don’t think the big picture is important during a case analysis?
I think that it was either “don’t FORGET TO look at the big picture”… …or it was “don’t JUST look at the big picture.”
bchadwick Wrote: ------------------------------------------------------- “don’t FORGET TO look at the big picture”…
numi Wrote: ------------------------------------------------------- > $tarving_Banker Wrote: > -------------------------------------------------- > ----- > . Ratios should > > certainly be covered in your analysis but don’t > > look at the big picture(SWOT analysis, > Management, > > etc) > > Can you please explain why you don’t think the big > picture is important during a case analysis? Agreed - I hope that was a typo, but industry analysis definitely should be included from the hiring manager’s I’ve spoken with (that number is equal to two when discussing how they analyze and what their response would look like if asked.
Which do you think are the most important ratios for credit analysis?
interest coverage, interest coverage, interest coverage…and interest coverage
The most important ratios depend on the industry; however, some common ones are leverage (debt/EBITDA) and a coverage ratio such as fixed charge coverage. Basically, can the Company service their debt while investing to maintain their revenues and competitive advantage? When reviewing a potential transaction you’ll want to know the following: Tenor: The longer you have either money out of the door or a commitment to lend the greater chance something can go wrong before you can do something about it (assuming a covenant isn’t tripped). Covenants: These provide protection as a means to either give the lender an early warning sign to get out of the deal or the ability to strengthen their structure through additional covenants, collateral, pricing, etc in the event the borrower’s financial condition deteriorates. Seniority: Obviously you want to know where in the capital structure you are. Are you senior, subordinated, etc? Basically, do you come before everyone else? In the event things start going south, do you have a seat at the table? Since you are interviewing with a commercial bank, all of your lending would likely be senior. Financial metrics: Most people can agree that you want someone who is financially viable and who can service their debt. But be careful simply relying on financial ratios. Industry: Consider Porter’s five forces. Industry dynamics can have an overwhelming impact on a borrower’s ability to service debt over the long term. Risks or Critical Issues: Every deal or potential borrower has repayment risks that should be identified and mitigated. These can include industry risks such as legislative risks, intense competition, changing industry dynamics, low barriers to entry, large capital requirements, etc., or it could be risk specific to the borrower such as high leverage, refinancing risk, management change, etc. Access to other sources of capital: Can the borrower raise capital elsewhere to pay you off? Collateral: Are you secured or unsecured? If secured, what is the collateral? Hope this helps.
Hi d3donahue, While a lot of ground has already been covered by the above posts, a structured approach could be useful (especially if you are given a case study): Segment the credit risk analysis into different types as below : (a) Define your counterparty. Who are the parties on whom you have a legal recourse to (include here the borrowers, co-borrowers and guarantors, CDS providers). Who are the other parties, whose continued well-being is important for your credit exposure (typically includes subsidiaries, holding companies, suppliers, customers etc). You would not have legal recourse to these, but need to be covered in your credit assessment. (b) Structure risk : These include : (i) level of finance : is the debt at holdco level or operating company level. If at holdco level, servicing of the debt would be affected by possible cash upstreaming restrictions by debt providers at the opco level. To that extent your debt will be structurally sub-ordinated to the opco level with regard to level of finance (ii) Your relative position in the overall debt profile : other debt maturing before yours (structural subordination in terms of tenor); other debt enjoying better collateral protection (structural sub-ordination in terms of collateral); (iii) Check whether inter-creditor arrangements are in place and if there is subordinated debt in the balance sheet, whether it is indeed completely sub-ordinated in terms of claim on cashflow, security etc. © Business risk assessment: Typically involves industry analysis, counterparty’s competitive position within the industry, cyclicality (latter very important especially in commodities) (d) Financial analysis : (i)Typically leverage (Debt/EBITDA), Gearing (Debt/Tangible Networth), Interest Cover ((EBITDA -Taxes)/Interest)) and Debt Service Coverage Ratio (DSCR) i.e. ((EBITDA-Taxes)/(Interest + Principal amortization)); Collateral coverage are considered important. (ii) More important is cashflow analysis and checking if Net Cashflow From Operations (NCFO) exceed the financing payments due (i.e. interest and principal amortizations) (iii) If there are periods when the NCFO is inadequate for financing payments (due to say bullet loan redemptions) a.k.a refinancing risk; check if there are sources of back-up liquidity in the form of (cash + marketable securities) and available revolver bank lines which can be drawn to meet liquidity mismatches. Also check if the financial profile of the company is projected to be healthy enough to raise the required refinance. (iv) It is normal to draw up projected financials, especially for long term debt analysis. In such cases, the profitability assumptions should be closely linked to the business drivers (for e.g. commodity prices, input cost parameters etc.). It is also common to run stress scenarios on these drivers and then examine debt serviceability (e) Evaluation of covenants : whether the covenants are tight enough and provide adequate protection. Ideally, the covenants should breach in a projected stress case (the idea being that if such a stress scenario actually occurs, you can get the counterparty to the table early enough on covenant breach; without actually waiting for a payment default). (f) Do look out for significant investments planned for capex, M&A etc. as this can significantly alter the current credit profile of the counterparty (g) In addition to the more quantitative assessments mentioned above; assessment of management quality, legal jurisdictions and risks thereon, compliance/policy requirements need to be looked at. If the counterparty has an external rating available, that is a useful reference point as well(though this remains very debatable !!) Trust the above is useful and all the best for your interview.
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This is great guys.
Thanks guys. I was caught way off guard. The only related question I had was, “If you were to personally lend money to a business, which would you rather look at (choose one) a balance sheet or an income statement. Why?” I answered balance sheet because I would want to know who else they owe money to and how am I assured my loan will be paid off. Outside of that I think I was a little too caffeinated and jittery going in. But I was expecting technical questions. I’ll let you know what I hear in a week.
Sorry I missed this thread. There are a lot of good answers on this thread (particularly vjay’s), and it sounds like the interview in question has already taken place, but to really drill down we’ve got to know exactly what kind of credit we are talking about. There’s a big difference between credit analysis of public bond issues and analyzing the bank debt of a mom & pop, and everything inbetween. Disclaimer: I am a Senior Credit Officer for a commercial lending group at a large bank, and I hire credit analysts. I’d be happy to answer questions if anyone is still interested, but my expertise is mainly around bank debt to private companies.
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Thanks OldSchool. It’s for a bank, analyzing the company stmts of borrowers for $5-100M loans. It is not for public bond issues. I’ve been stressed this past weekend trying to nail down FSA b/c I wasn’t sure how technical the interview would be. Ends up it was technical at all, but that doesn’t mean the second interview won’t be.
If it is a junior level position, I doubt there will be too much in the way of technical questions, beyond wanting to test your intermediate level accounting knowledge. For a entry level credit analyst, ability to read and interpret financial statements is key. Ability to analyze them and draw conslusions is better, but not required or expected at the entry level. Other factors, in no particular order: - Intellectual curiousity - desire to understand how something works and the risks involved is more important than sheer brainpower, not that brainpower is bad at all. - Detail focus. To lend money successfully you’ve got to be on top of a lot of nit picky items. - Maturity, confidence, and sound judgement - is this someone I’ll want to put in front of borrowers to negotiate deals in a few years? - Oranization & Attitude - sounds wishy washy, but the most important role of a junior analyst is to keep things moving, i.e. staying on top of things and doing what you’re told when you’re told without being told twice. No one wants their greenhorn slowing up the deal or bitching about the grunt work. At a more experienced level analytical background and experience become more of an issue, as you’re looking for someone to hit the ground running. Lots of those technical details have been covered above. Specifically for commercial bank lending, top two ratios by a wide margin: 1) Debt Service Coverage. This has many variations (funds flow, fixed charge, w/ and w/o interest, real estate or project specific) but the essential is the same: The ability of recurring cash flow to cover meet the obligations of the borrower. 2) Leverage. Most common is tangible net worth / equity. How much leverage is too much varies by industry and structure, but lower leverage means more flexibility. These two ratios will be reflected in the loan covenants of the majority of your deals. In any business or industry where theres a lot of cyclicality or seasonality, working capital analysis becomes key as well.
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