TOOL F3
This tool helps to assess the existence of group structure risk by comparing consolidated, partially consolidated, and standalone financial statements.
ANALYTICAL APPROACH
Step 1: Group Structure Diagram
• Draw a group structure diagram depicting ownerships and other legal intra-group relationships, and identify the position of legal counterparties
Step 2: Horizontal Analysis
• Undertake a horizontal analysis by setting up a series of consolidating statements. Start with the group’s consolidated statements, then depict the stand-alone statements of the parent / holding company and any major subsidiaries or sub-groups, and then derive the Rest of Group (RoG) as the residual.Use the tables shown in the Exhibits as templates
• Use the tables shown in the Exhibits as templates
• Identify and assess the following:
1. Location of principal operating assets, contracts and cash flows, and which creditors have access to them?
2. Location of the group’s principal indebtedness (secured and unsecured) and existence of any guarantees or other debt-related intra-group relationships?
3. Where profits are being reported within the group?
4. Whether the credit needs links logically with the choice of legal counterparty
Step 3: Conclusions
• Draw conclusions on group structure risk, with respect to the following:
1. The absolute and relative financial health of LCPs vis-à-vis the credit base
2. The degree of structural subordination (if lending to Holco), based on the distribution of debt and the asset profile of the parent
3. Debt priority position relative to other secured debt and creditors.
4. The extent of intercompany asset & liabilities, sales and dividend flows
5. Whether there is a misallocation between assets & liabilities and cash & debt
6. Whether the distribution of assets, debts, profits, and cash flows within the group has changed over time(if this analysis is done for more than one year).
7. Whether guarantees given to third parties create “ credit dilution”
8. Whether transfer pricing improves / damages the risk profile of the exposure?
- Compare EBITDA margins; the allocation of interest with debt; intercompany assets and liabilities; and transfer of assets.
