Here’s our list of the top 10 topics on the minds of credit professionals in 2010:
10) Risk Management – We’ve written many times this year about risk management, both good and bad. Whether it was BP and operational risk, suppliers dealing with customer concentration risk (or “Wal-Mart Risk”), or Lehman just not managing risk. This topic was on our radar in 2010 (and needs to stay there into 2011 and beyond).
9) Games CFOs Play – Aggressive financial reporting (and outright fraud) can happen at any time, but management’s motivation to do it is heightened during an economic downturn when there is pressure to “hit the numbers” (and not breach covenants, etc.).
8 ) Managing High Risk Clients – Sure the recession is over, but many companies are still struggling with high leverage, high competition, low sales growth, and high costs. Lenders and bondholders will be working with many “high risk” clients well into 2011.
7) Intercreditor Priority – When times are good (think the 2003-07 credit bubble), no one pays much attention to collateral and subordination (or covenants, or any other part of credit documentation for that matter). The restructurings and bankruptcies of the great recession reminded us how important these issues are. We fear that the market is already starting to forget these lessons (think covenant lite and second lien!).
6) Cash Flow Analysis – Cash is king. Real cash, not EBITDA. Enough said.
5) Liquidity – Many CFOs (and lenders) have learned the hard way that liquidity can be the most important element of financial strategy. Our favorite analytical tool for looking at liquidity is the liquidity position.
4) Financial Strategy – Leverage matters too. A company’s debt strategy should depend on its business needs and business risk, not just the condition of the capital markets. The levering up we saw in the boom is evidence that some companies forgot this rule – many have been working to delever since 2008.
3) The Credit Cycle – The debt markets have returned (although not to the levels of 2006-07, yet). The return hasn’t been smooth, however. Issuers and investors have been looking closely at the relationships between the loan and bond markets, perhaps venturing where they haven’t been before.
2) Investing in People – While bank compensation levels haven’t necessarily returned to 2006-07 level (or most), we certainly see a lot of hiring at the analyst and associate levels, and more business and opportunities for more senior professionals.
1) New Opportunities – With the economy (slowly) improving (think increasing loan demand), and bank capital on the mend (think increasing loan supply), we think the increasing bond and loan volumes we saw in the second half of 2010 will continue into 2011. Here’s hoping that 2011 brings you many new opportunities.
What “hot topics” do you see looking forward – leave a comment…
I would add information risk – the quality of information, especially for middle-market and non-public companies, continues to be a problem, and I don’t see it getting any better.
I would add consumer and SME credit to this. For non-banking sector large corporates (i.e. companies without access to peoples banking transactions) it is hard to make lending decisions without access to the underlyingf default probablities that are held in background by the major ratings agencies. This means that modelling portfolio and sectoral risk and pricing / generally mitigating becomes almost impossible. A real shame as I think we could make much better (and about as tailored as you can get) lending decisions with this. We have spoken to a number of ratings agencies (you can guess which ones) and they have helped a tiny bit, but not enough if we want to take low-end portfolio led credit product development and credit decision making.
I have a sneaking suspicion that the agencies do not want to release this information at a fully granular level as this may be considered proprietary information and may even expose weaknesses in their approach?
Does anybody have any ideas on any of this?
We are most worried about event risk involving LBOs and HLTs. Back to 05-07. Investment grade indentures have such weak creditor protections. Most negative pledges have work-arounds via subsidiary guarantees. Change-of-control language seems to be getting weaker due to carve-outs involving management-led buyouts. As profit growth languishes, management teams will look for ways to prop up share prices.