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!
well it sounds like you don't know this but a 3-statement model lays out financial statements historically and looking forward. a dcf is a valuation methodology that (if available) would be completed with the use of a 3-statement model. So i guess to answer the question you didn't parlay, you should be able to do both regardless. for a mining group, you should also understand how NAV models work
Thank you for the reply. Quick question regarding def - theoretically wouldn't it be possible to do a dcf without doing a full 3 statement if the assumptions are simplified? Most of the components would require assumptions about revenue growth, Capex, working capital, but seems like it doesn't necessarily require linking all 3 statements together? Please correct me if I am wrong and thanks again.
You don’t necessarily have to do a full three statement model to have a functional DCF, but it is a skill you should develop as you are learning to model initially. The forecasted cash flows in your DCF come from the three statement model.
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.
Exactly what I am looking for - thank you so much!
This is spot on. Only thing I would add is that some modeling in corporate banking involves a DCF valuation where the credit commitment is Enterprise Value reliant, usually due to a lack of pledged collateral covering the facility. The Enterprise Value could be used to determine the value of the business in a liquidation scenario and determine whether said value is sufficient to cover total commitments.
Agree with Watdo's comment above for general corporate debt.
In the structured credit space (sometimes lumped in with corporate banking), a waterfall model is usually the basis of our analysis of the pool of assets. Instead of modeling the 3 FS, we are reducing it to an SPV holding pool of assets creating cash flows to be applied in priority of the waterfall (i.e. management fees, interest, principal, then dividends/excess cash distributions). From there we stress the asset values, cash flow, LIBOR, etc.
Oh that's very interesting - is this typically only used when covering a certain industry?
Corporate banking team do modeling? Isn't there a separate credit team that does that?
Depends on the bank. I know banks where the credit guys do the model. I've seen Lev Fin guys be mainly responsible for the model, and I've been apart of banks where coverage and LevFin own the model depending on the circumstance.
What would you say is the best resources for learning the mindsets and practices of corporate bankers? There are a lot of materials out there for IB but not so much for CB. I was able to do some projections and look at key credit ratios/metrics (e.g. coverage ratio, leverage ratio, cf available for debt service), but other than that I don't really know what else I should be looking at - it felt like I wasn't drilling deep enough and was missing something.
I do not EVER use an M&A model or DCF. I currently work in a specific vertical you didn't mention, and we use a specific 3 statement model that allows us to flip switches and change the transaction type (refi/LBO/M&A). Even with acquisitions we're not really focused on the modeling aspects - what are the key risks? Will our company's creditworthiness increase or deteriorate? What will the new capital structure look like?
Even in my old generalist group, we specifically used a 3-statement model. Focuses are always on potential covenant breaches (leverage/fixed charge coverage), sources and uses, years to clear, cash balance and cash flows. I don't need to discount anything.
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