Seeking advice on Corporate Banking modeling
I am researching specific modeling techniques in corporate banking for diversified groups, would some of you who work in the field mind educating me on this? For instance I have heard that groups covering diversified use 3-statements, while metals&mining use dcf more and is more technical. I am specifically trying to learn as much as possible about the technicals used in groups covering diversified but am struggling to find much info out there. I am half way through S&P Fundamentals of Corporate Credit Analysis and incorporated some cash flow modeling techniques outlined in the book, but my concern is that such methods may not be relevant to the specific group I want to break into. Any advice is appreciated!
Corporate bankers will use the same general models that investment bankers will use, with less of a focus on valuation, and more of a focus on cash flow and credit metrics. Ignoring industry specifics, corporate bankers will generally use a 3-statement operating model or M&A/LBO model (depending on the transaction) to project out key financial metrics like revenue, EBITDA, interest expense, debt, etc.
The core focus for corporate bankers is generally building to unlevered FCF or cash flow available for debt repayment, as they want to assess the ability of a borrower to service and repay its debt. The model is then also likely to look at core credit metrics like leverage, interest coverage, fixed charge coverage, etc.
Ultimately, a corporate banker is going to be focused on using standard modeling tools to asses creditworthiness, whereas an investment banker will generally use their models to drive an analysis of valuation. Different goals, similar tools / techniques.
As a general statement, at the end of the day, lending is cash flow based, you need to generate cash to service debt and ultimately to repay.
Each industry is different but as said before, corporate banking is going to focus on EBITDA and unlevered FCF.
That’s the macro, on the micro you need to be able to understand a company’s operating / business profile and competitive position. What are the generators of cash flows and what are the risks factors associated with the CFLs? Are they sustainable?
To do that you really need to dive into the company, what does it do, where does it source revenue from, does it have any customer concentrations, key personnel (key man risk), how does it stack up relative to peers, where is the industry and sub-sector of the industry heading...all of these are questions that corporate bankers would focus on. On a macro level it’s understanding the business model and it’s viability. Afterwards bankers analyze various facets (historical operating performance, financial projections, key business segments, management, sources of repayment) to make lending decisions.
Try to read some Moody’s and S&P credit ratings, they are condensed and bankers can’t rely on them (I.e. have to make independent lending decisions) but they’ll give you insight on the key considerations pertaining to credit.
There is a lot more to it than just looking at debt / EBITDA (or at accretion / dilution for IBD) that’s only an output