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Presentation on theme: "CREDIT QUALITY AND DEBT CREDIT ANALYSTS EXPECTATIONS 18 novembre 2005."— Presentation transcript:


2 18/11/05 2 > BNP Paribas AM is a major asset manager with EUR 263 billion of asset under management as of 30 September 05 > BNP PAM has developed a strong international culture with a presence in 25 countries > More than 1,200 employees including 450 professionals dedicated to portfolio management > Fitch / AMR has assigned an AM2+ rating (equivalent to AA+) to BNP Paribas AM BNP Paribas Asset Management BNP Paribas AM is one of the largest European asset managers Main Asset Management Centers Client Servicing Centers Asset Management and Client Servicing Centers

3 18/11/05 3 > EUR 147 billion of Fixed Income assets as of September 2005 > 180 Investment professionals based in London, Paris, NY, Tokyo and Hong Kong > Within the Fixed Income, expertise is diversified across 1,600 different funds with dedicated strategies Dedication to Fixed Income Products BNP Paribas AM is strongly committed to Fixed Income management Growth of Assets under ManagementAllocation of Fixed Income Assets* * as of September 30, 2005

4 18/11/05 4 Recognised Performance > BNP Paribas AM has conservatively grown its portfolio since inception Neither default nor distressed sales Credit Fund Track Record* BNP Paribas AM has consistently delivered a strong fixed income performance > BNP Paribas AM performance has been acclaimed by the market: Lipper Fund Awards, France, March 05: trophy for 3Y performance, certificate for 10Y performance Lipper Fund Awards, Hong-Kong, February 05: best fund for 3Y and 5Y performance S&P / La Tribune, France, March 0510th march 2005: certificate for 3 years performance S&P / Diaro Economico, Portugal & Spain, March 05: first price for 1, 3 year performance * Source: ClientPerf system, figures as of 31/12/2004. Benchmark is Lehman Euro Aggregate Corporate from 30/06/2003, Merrill Lynch EMU Corporate before. S&P

5 18/11/05 5 Credit Research > Distinct teams provide a full coverage of European companies 9 credit research analysts (sector specialised) covering on average 30 names 70% of industrial and utilities of the Merrill Euro investment grade index 70% of the iTraxx Europe Crossover > Credit reports are produced weekly and verbally presented to portfolio managers > State of the art technology ensures credit analyst and portfolio managers benefit from local proprietary research infrastructure BNP Paribas AM relies on its own in depth research analysis

6 18/11/05 6 > To contribute with funds managers to the investment or divestment decision in credit issuers > To contribute to the supervision on credit and counterparty risk by proposals on limits with maturity conditions As % of outstanding funds Or absolute value limits > Credit Research at BNPPAM : Risk Committee Money market Eurobonds Structured High Alpha Credit Research CARDIF ISR What are the applications of credit research at BNPPAM? ISR

7 18/11/05 7 ENVIRONMENT Rating anticipation and credit analysis, comparative analysis : business profile FINANCIAL POLICY financial profile MANAGEMENT STRATEGY SUPPORT

8 18/11/05 8 The credit analysis : a complete approach > Outside observers often limit credit analysis to ratios & debt analysis They accordingly forget : Business and sectors analysis Strategy and financial policy analysis Management assessment Structures analysis That debts and ratios have to be forecasted That cash flows have constituents and proceed from earning statements

9 18/11/05 9 Financial profile analysis > Financial profile Data analysis such as operating margins Ratios such as cash flow on debt GOAL : assess the financial flexibility of the issuer and its capacity to reduce its debt > Credit analysts and rating agencies have their own methodology & make their own adjustments on earnings, debt and cash flow Such as lease, given guarantees, securitized past and future receivables, pension funds deficits, theoretical debt of captive financial business, cash burn due to non recurring events GOAL: calculate a debt including every financial obligations and a recurring cash flow reflecting also all financial obligations These adjustments have in each methodology variable parameters and methodologies change overtime The assessment of financial flexibility relies on actual and adjusted data

10 18/11/05 10 Credit analysts approach > Profitability Recurring EBIT adjusted for leases, pensions… Recurring EBITDA adjusted for leases, pensions… Recurring FFO, CFO adjusted for leases, pensions… > Debt and credit quality Gearing, solvability, liquidity Ratio of adjusted debt to adjusted cash flow (FFO, CFO, FCF) Adjusted interest coverage > Recovery rate Asset value

11 18/11/05 11 Equity analysts approach > Profitability analysis Recurrent earnings, EBITDA, EBITA > Balance Sheet Structure Ratios of gearing, solvability and liquidity Net financial debt Balance sheet flexibility Employed capital > Analysis of performances using EVA Strategy success rate & events anticipation > Equity valuation Discounted cash flow EVA and cost of capital Multiples of earnings, EBITDA, EBITA Patrimonial value (Revalued Net Worth )

12 18/11/05 12 Credit analyst approach focused on cash flow > True operating cash flow (CFO) And not EBITDA post normalized working capital change Inescapable to forecast debt Its a partly actual debt Its a partly actual debt, not normalized from non recurring events such as external growth, restructuring, foreign currencies change including coverage impact, but adjusted as previously explained in order to be more representative Adjusted recurring operating cash flow To calculate credit ratios using CFO and debt Its a normalized cash flow adjusted as debt, used to assess the financial flexibility of the issuer apart from non recurring events Its a normalized cash flow, adjusted as debt, used to assess the financial flexibility of the issuer apart from non recurring events A dual approach, recurring and actual cash flow, actual debt and adjusted debt

13 18/11/05 13 Credit approach : What do we need to forecast cash flow ? > A true understanding of its main components apart from profit FFO Provisions Pension & OPEB split between adjustments of non cash expenses & cash contributions Changes in deferred taxes Gain, losses on disposals Dividends received from associates Non recurring effects Working capital > Operating working capital Strictly speaking (inventories + trade receivables-trade payables) Indirect (social debts, taxes) > Non operating working capital Fair value adjustments, provisions on operating WC Hedges of debt Impacts of financial management (sold receivables, loans to affiliates) Non cash adjustments (pensions, interest costs on provisions…)

14 18/11/05 14 Equity approach different from credit one : proxy for cash flow and normalized data > EBITDA Often used as a proxy for cash flow but insufficient for credit analysts > Normalized working capital to make their analysis and forecasts, equity analysts need a working capital directly tied to business and adjusted from non recurring effects > Convergence, Normalized working capital to calculate balance sheet ratios or credit ratios using CFO Sold receivables increase the volatility of gearing and liquidity ratios and disconnect them from operating data > Divergence Calculation of an actual net debt before adjusting it by leases, pensions… This divergence is only a complementary need as you have to proceed by steps to be able to understand past & present in order to foresee future

15 18/11/05 15 Working capital and IFRS > Headways Not yet matured discounted bills of exchange are put back in balance sheet FCC compartments are consolidated as SPE when the vendor keeps the majority of risks & rewards (French rule) Derivative balance sheet accounting improves the risk appreciation of operating finance receivables & financing liabilities > Not yet solved problems The publication of gross value of inventories, trade receivables and payables are not mandatory nor that of detailed related provisions. The change of provisions included in the change of working capital are not published in cash flow statement The receivables sold without recourse are not in balance sheet and not published The UGT data are not mandatory (eliminations not always allocated, internal exchanges such as sold receivables, working capital by items not given) Other receivables & other payables are detailed in annex, not their change in cash flow statement The interim accounts dont give such details Other non cash not in FFO included in working capital (pension liabilities change, short term deferred tax change…

16 18/11/05 16 New needs with IFRS regarding R&D & Debt > R&D accounting implies to know Capitalized expenses Depreciation > New presentation between current & non current Financial assets Data not sufficiently precise > IAS 39 Derivatives included in financial assets & liabilities

17 18/11/05 17 Information on the outstanding debt > Many issuers in a group More or less remote from the sources of cash flow Debt not always guaranteed by the parent company Debts with or without covenants > We need to understand The structure of the group, The role of the issuers The support of which they could benefit > We need to know the characteristics of each debt Regarding guarantees & covenants … ON THE WEB …..

18 18/11/05 18 Conclusion > Credit Analysts information needs are additional of the equity analysts needs > Cash flow understanding & guidance is key > In all its components from FFO to CFO to investing cash flows & shareholder flows > With a segment & geographical approach when useful > in order to understand & foresee Net Debt change & credit flexibility > Disclosure on the main components of Net Debt is critical


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