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Finance, banking and capital markets

Some of the suggested courses are set out below. If there is any particular area of interest that is not covered please contact us.

1. Understanding & interpreting financial statements for finance and capital markets lawyers

Objectives

In order to effectively draft the accounting clauses in finance agreements, lawyers need a basic understanding of the financial statements. This will help them put what they are being asked to draft into context and help them identify issues that need to be resolved before finalising the agreements.

By the end of this course, participants will be able to find their way around a set of accounts and be better placed to discuss and negotiate the accounting clauses that they are asked to draft.

Content

  • Accounts in the context of finance and capital markets transactions
  • What information is included in a set of financial statements, what is not included and the link to the business model
  • Importance of understanding the accruals basis of accounting and why “earnings or profit” is different from cash
  • Key components of the financial statements
    • Narrative reports and audit reports
    • Statement of financial position (balance sheet)
    • Income statement (profit and loss account)
    • Cash flow statement
    • Other primary statements
      • Other comprehensive income
      • Statement of changes in equity
    • Notes to the accounts
  • Finding your way around the accounts and extracting information
  • An introduction to consolidated (group) accounts and accounting for investees including joint ventures and associates
  • A more detailed analysis
    • A brief introduction to credit analysis and the link to financial statements
    • The importance of earnings (EBITDA), interest and debt
    • What is EBITDA, why is it important and how is it calculated
    • Assessing liquidity
    • Important financial ratios and the link to financial covenants
  • Key information about financial statements that finance and capital market lawyers need to know when drafting information undertakings
    • Types of financial statements and other financial information
      • Annual accounts
      • Management accounts
      • Interim accounts
      • Pro forma financial information
    • Basis of preparation
      • GAAPs and the issue of frozen and rolling GAAP clauses
      • Degree of accuracy and completeness including:
        • True and fair view
        • Fairly present
    • The work of the auditor
      • Audit reports on annual financial statements
      • Auditor certificates in the context of finance agreements
  • Summary and conclusions

Course Types

In house courseIn house
Face to Face courseFace to Face
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2. An introduction to financial maintenance and incurrence covenants

Objectives

The objective of the session is to provide junior lawyers with an introduction to nature of financial maintenance and incurrence covenants included in different forms of debt finance.

By the end of the session, participants will:

  • Understand the purpose of the covenants
  • Understand how they may work in practice
  • Appreciate the accounting issues involved with defining the terms

Content

  • Different types of finance
  • Typical leverage finance structure and types of debt
  • Types of covenants – maintenance and incurrence and when each may be used
  • An introduction to basic credit analysis and the link to financial covenants including a short reminder of what is in a set of financial statements, what they tell us and why they are so important
  • Importance of defining earnings and debt
  • EBITDA
    • What is it and how is it calculated
    • Why is used as the earnings basis in financial covenants
    • Is it a proxy for cash?
    • What are its advantages and disadvantages?
    • How should it be defined?
  • Maintenance covenants
    • Why do lenders use covenants
    • Typical covenants including:
    • Leverage
    • Interest cover
    • Debt service cash cover
    • Capital expenditure
    • Net worth
    • Other covenants
  • Incurrence covenants
    • Typical incurrence covenants
      • Debt incurrence covenants and how they are calculated
        • Fixed-charge coverage ratio and
        • Leverage ratio tests
      • Issue of definitions and carve outs
      • Restricted payments
      • Change of control
      • Sales of assets
  • Different approaches?
    • Full covenants
    • Covenant “lite”
    • Covenant “loose”
    • Revolving credit, senior debt, mezannine debt or TLB, and high yield bonds
  • Simple numerical examples will used to demonstrate operation of the covenants

Course Types

In house courseIn house
Face to Face courseFace to Face
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3. Drafting financial maintenance covenants: accounting terms

Objectives

This course is aimed at those who will be negotiating and drafting the financial covenant sections of a facility agreement and focuses in on the most widely misunderstood definitions and concepts of EBITDA and its adjustment to cash flow.

As a result of this session participants will be able to:

  • Communicate more effectively with bankers and clients when taking instructions on financial covenants
  • Identify items that may require adjustment when setting covenant components
  • Fully understand the accounting consequence of key components in selected covenants; and
  • Appreciate current accounting issues impacting covenant negotiations.

This will enable delegates to:

  • Spend less time in drafting and researching
  • Negotiate deals more effectively and efficiently
  • Be better prepared for client meetings

Content

Material: Illustrative financial statements and incurrence covenant clauses and definitions

The course will be based on the firm’s standard leveraged finance covenants, definitions and interpretations and a case study set of accounts.

Refresher: Putting covenants into context

  • The purpose of covenants
  • Overview of commonly tested covenants and which type of transaction they are relevant to (e.g. leveraged finance v property finance)
  • Which primary statement in the accounts each covenant relates and why this is important

Reminder: Information undertakings

  • This session will focus on the Information Undertaking clause and highlight areas to watch out for when negotiating. This will include, amongst others:
  • Which (Statutory versus Management, Audited or not) and when
  • Accounting regime – which (UK GAAP, EU IFRS, ‘full’ IFRS, another version of IFRS GAAP?) and at what point in time
  • Standard of preparation (True and Fair or represent fairly or another?)
  • Compliance certificate (when and signed by who?)

EBITDA

  • Setting the covenant scene: Focus in on covenants commonly seen which test on EBITDA and what they are testing (interest cover and leverage)
  • Conceptually what is EBITDA? And how should it be defined?
  • Line by line mark-up of the precedent definition of EBITDA – the approach in this session will be:
    • A short accounting lesson on each of the accounting adjustments in the LMA’s definition
    • Translation of that theory into practice by marking up the relevant accounting policy and line items in a real set of financial statements
    • Revisit the EBITDA definition to see how the precedent addresses the issue, why it is worded in that manner and any possible options given
    • Consideration of bank/borrower friendly viewpoints

Cash flow

  • Setting the covenant scene: Focus in on cash cover (debt service cover) and what it is testing
  • The theory behind how you adjust EBITDA to calculate cash flow –
  • Putting the theory into practice using the precedent clauses including adjusting for working capital and capital expenditure
  • Practical tip on where to go for help in a set of accounts when drafting this definition

Interest cover and leverage

  • Consideration of items within the definition of ‘Finance charges’ and ‘Debt’ where an accounting understanding is needed, for example, leases and redeemable preference shares and the accounting for loans

Course Types

In house courseIn house
Face to Face courseFace to Face
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4. Drafting incurrence covenants: accounting terms

Objectives

As the key incurrence covenants, restricted payments and limitation of debt, revolve around the definitions, these will be keenly negotiated. However, important elements in these definitions such as Consolidated Net Income, EBITDA and Debt, whilst being derived from the financial statements, are not terms used in International Financial Reporting Standards (IFRS) and as such need to be negotiated and agreed for the purposes of the agreement.

The aim of this course is to better prepare participants for these negotiations by showing how these terms may be defined and derived from the financial information and by showing the effect of such negotiations on the covenants themselves. Throughout both investor and borrower perspectives will be considered.

Content

Material: Illustrative financial statements and incurrence covenant clauses and definitions

Using the illustrations we will identify key financial definitions with accounting implications, impacting the following covenants:

  • Restricted Payments Covenant
  • Limitation On Debt Covenant

Consolidated Adjusted Net Income – a detailed mark-up of the definition:

  • How are the terms defined and why? What are the issues and what are we trying to achieve?
  • Which line item would the issuer start from in their consolidated audited financial statements? (For example: ‘net income’ which profit line does this refer to?)
  • ‘As determined in accordance with IFRS’ – implications of different versions of IFRS in different jurisdictions
  • What is the significance of ‘consolidated’ – who is/isn’t included and on what basis?
  • Include or exclude ‘reductions in respect of preferred stock dividends’?
    • Reminder of the rules determining how issuers treat preferred stock in their IFRS accounts
  • ‘Excluding impairment of goodwill/intangibles’ – a reminder of how impairment works and why these charges might be excluded

How would a selection of the following terms used in the definition of Consolidated Adjusted Net Income be interpreted by the issuer looking at their IFRS accounts?

  • ‘Persons accounted for by the equity method of accounting’
    • What is the Equity method of accounting?
    • Which category of investments does it apply to?
    • How have recent changes to IFRS extended the application of this treatment?
  • ‘Extraordinary, exceptional, or unusual gains or losses’
    • Which, if any, of these would be defined with certainty in the IFRS accounts?
    • Consider the use of specific examples within the definition
  • ‘Non-cash compensation expenses arising from the grant of stock options’ – overview of the treatment of share-based payments in the issuer’s IFRS accounts to understand the impact on profit and the rational for adjustments.

‘Non-cash charges in respect of redundancy or restructuring’

  • For example?
  • ‘Unrealised gains or losses in respect of hedging obligations’
    • When will changes in the fair value of hedging instruments affect earnings?
    • When will they affect reserves?
    • What is the impact if an issuer is able to apply hedge accounting?
  • ‘Unrealised foreign currency transaction gains or losses’
    • What types of items does this apply to in the issuer’s financial statements?

For each item suggested in the list above an example can be provided, for delegates to consider the impact on the issuer’s ability to make restricted payments.

Consolidated EBITDA and the Fixed Charge Cover Ratio – the linkage to Consolidated Adjusted Net Income and a detailed mark-up of the definition:

  • What is being included in fixed charges that requires an accounting consideration?
    • Cash/Non-cash dividends due?
    • Whether or not declared?
    • Preferred stock?

Course Types

In house courseIn house
Face to Face courseFace to Face
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5. Financial and accounting disclosures in an offering memorandum

Objectives

By the end of this session, participants will be much clearer on how the summary financial information, MD&A, use of proceeds and capitalization tables should be prepared.

In this course we will cover:

  • Analysis of summary financial information
  • Use of Non-GAAP measures
  • Preparing pro form financial information
  • Preparing use of proceeds and capitalization tables
  • Information to be disclosed in the MD&A

Content

Material: Illustrative IFRS accounts and illustrative or existing offering memorandum

Financial information in the offering memorandum

Preparing the offering memorandum

  • Forward looking statements and preparing pro forma financial information
    • Importance of disclaimers
    • Preparation
    • What are they telling us
    • Why are they useful and what are the issues
  • Summarizing the financial information
    • What information and why?
    • The use of Non-GAAP measures and health warnings
    • Details of preparation and the importance of the footnotes
    • Case study: analysing the information
      • Key metrics including EBITDA and EBITDA margin, EBITDAR, Free Cash Flow and Working Capital
  • Consideration of the assumptions used in producing the pro forma accounts (including a review of S-X regulations)
    • Using a case study example and assuming that the proceeds are used to make an acquisition:
    • Explanation of common adjustments to arrive at pro forma disclosures
  • Preparing use of proceeds and capitalization tables
  • Reflecting the debt in the borrower’s financials once issued
    • How IFRS treats financial liabilities – a review of how IFRS accounts for different types of bonds
    • Why carrying value is often not the same as nominal value?
    • Illustrative examples to demonstrate bonds’ carrying value
  • Review of what financial information is required in the MD&A including:
    • Comparisons of financial information
    • Liquidity and capital resources
    • Critical accounting policies and estimates
    • Materiality

Course Types

In house courseIn house
Face to Face courseFace to Face
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6. Negotiating EBITDA

Objectives

Finance facility agreements include a number of covenants that certain financial ratios will not be worse than certain agreed levels. Typically the agreements will include some or all of interest cover, fixed charge cover and/or leverage ratios. These ratios are based around three financial amounts which have to be derived from the financial results: consolidated interest expense, consolidated (net) debt and consolidated EBITDA.

The issue is that in many accounting frameworks, these terms are either not defined or are never referred to. Therefore the agreement has to set out in detail how these amounts are to be calculated from the financial information.

This course focusses on negotiating EBITDA.

Using client supplied precedent clauses or a recent deal and a set of IFRS financial statements we will examine how EBITDA is to be defined and what are the issues.

By the end of this practical course, participants will be in a better position to negotiate the EBITDA definition as part of a finance agreement.

Content

Using illustrative financial statements and illustrative definitions.

  • GAAP and Non-GAAP measures
  • Context in which EBITDA and Adjusted EBITDA are used
  • Defining EBITDA
    • What is it and what it tells us
    • Credit analysis approach to EBITDA
    • A review of common adjustments with negotiating points from borrower/seller/lender/purchaser perspectives
  • Using the illustrative financial statements, and definitions, the definitions will be applied to the underlying financial information to demonstrate the calculation of EBITDA for the purposes of the ratio tests. Explanations will be provided for each of the adjustments together with the consequences on the figures
  • We will look at why credit agencies treat EBITDA with caution and consider the five key failings of EBITDA

Course Types

In house courseIn house
Face to Face courseFace to Face
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7. Effect of the new lease accounting rules on finance transactions

Objectives

Leases are one of the areas where they may be a significant “off balance sheet finance” element and for many leases there is no recognition in the balance sheet that the lessee has an asset that it uses or that it incurs a liability to repay the capital element of the asset being leased.

Lawyers negotiating transactions or financing often need to aware of which leases are on balance sheet and which are off balance sheet as this may have implications for the deal.

Everything will change with effect from 1 January 2019 when IFRS 16 takes effect (and FASB is introducing similar though not identical rules at around the same time) and now lawyers need to plan for these changes.

By the end of the session you will be in a better position to consider the effect the forthcoming changes of lease accounting will have on finance transactions and what factors to consider when negotiating the terms of a financing agreement including:

  • Negotiating EBITDA, Borrowings, and Finance Charges
  • Frozen and rolling GAAP clauses

Content

In this session we will review:

  • What is the issue?
  • Reminder of current lease accounting
  • New leasing standard
  • A complication: splitting contracts into lease and non-lease components
  • Effect on financial statements, Debt and EBITDA
  • Comparison to US GAAP (ASU 2016-02)
  • The implications for drafting
  • Checklist of points to consider

Course Types

In house courseIn house
Face to Face courseFace to Face
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8. Use of pro forma financial information

Objectives

Finance agreements often make reference to the use of pro forma financial information, for example as part of the summary financial information in an offering memorandum or as part of financial covenants whereby certain metrics (e.g. Adjusted EBITDA) is calculated on a pro forma basis.

Using case study of extracts from an offering memorandum, this course will consider:

  • When and why pro forma financial information is required;
  • Using Regulation S-X as a basis, explain how pro forma information is prepared and the disclosures that are required

By the end of the session, participants will be better placed to negotiate the use and disclosure of pro forma financial information as part of a legal transaction.

Content

  • Summary of requirements including
    • Regulation S-X
    • ASC 805
    • Non-SEC offering documents
    • Prospectus directive requirements
  • Transactions under Rule 144A
  • Events requiring pro forma information
    • Types
    • What information is required
    • Periods to be presented
  • Preparing pro forma information
    • Income statements
    • Balance sheets
    • Business combinations
    • Debt issuance
    • Other pro forma effects
  • Key disclosures
  • Involvement of Auditors

Note: A basic understanding of financial statements is a pre-requisite for this course

Course Types

In house courseIn house
Face to Face courseFace to Face
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9. Analysis of cash flows and link to liquidity

Objectives

Ultimately, a lenders decision to “invest” in an entity will come down to whether the lender will receive the expected return and repayment of the capital lent. This comes down to “cash”.

By the end of the session, participants will understand the importance of cash flows to debt issuance and will be able to analyse and draw conclusions about the cash flows of the entity.

Content

  • Analyzing a debt issue
  • Key analytical tools
    • EBITDA and cash flows
    • Stability of cash flows
    • Leverage and amortisation schedules
    • Priority of debt
    • Asset cover
  • Importance of cash flows, why this is different from earnings and what the cash flow statement tells us
  • Using a case study set of IFRS accounts:
    • Analysis of key metrics
    • Drawing conclusions for inclusion in disclosures
  • Differences between IFRS and US GAAP

Note: A basic understanding of financial statements is a pre-requisite for this course

 

Course Types

In house courseIn house
Face to Face courseFace to Face
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10. Groups, consolidation and accounting for investees

Objectives

Information disclosures and finance definitions such as EBITDA are often based around group or consolidated amounts. Therefore lawyers involved with finance transactions and negotiating such items must understand when group or consolidated accounts are required, what constitutes a group for accounting purposes and how the group or consolidated accounts are produced. Failure to understand this could lead to the Group being defined in a different way from the accounting requirement which may lead to unintended consequences such as an entity being left out of the consolidation for the purposes of the finance agreement.

This course is designed to provide lawyers with a clear understanding of the issues when deciding how to define groups for purpose of the agreement and how various investees will be included in the group accounts.

Content

The course will focus on consolidation in accordance with EU adopted IFRS (with a comparison to UK GAAP and/or US GAAP as appropriate) and use a set of published financial statements to illustrate the points being covered.

  • Which companies prepare group accounts?
  • Who is included in the group accounts?
    • The control model
    • Definitions of subsidiaries, joint ventures, associates and other investments
  • How do we account for subsidiaries?
    • Accounting treatment in the consolidation
    • Inter-group transactions
    • Goodwill
    • Mid year acquisitions
  • How do we account for joint ventures and associates?
    • The equity method
  • How do we account for other investments?
  • Issue of group accounts and pro forma (illustrative) financial information
  • Why this matters to lawyers?

 

Course Types

In house courseIn house
Face to Face courseFace to Face
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11. UK GAAP and IFRS accounting update for lawyers

Objectives

When putting together the terms of transactions, lawyers need to know not just about the current accounting rules and how they affect transactions but about any new rules due to implemented.

The purpose of the annual update is provide lawyers with an overview of some the key accounting changes that will be coming.

Content

New UK GAAP

  • Reminder of the new framework
  • Focus on differences in the accounting including
  • Intangibles
    • Investment properties
    • Groups
    • Financial instruments including derivatives and hedge accounting
    • Financial instruments – Inter-company loans at off market rates
    • Round up of other key changes including holiday pay, lease incentives and so
    • Use of different terminology
  • Effect on key benchmarks such as operating profit, EBITDA, Debt and Net Assets

 IFRS

Over the next three years, IFRS is changing significantly. The effect on the financial reports and the commercial issues cannot be underestimated.

  • Review of the three key areas of significant change
    • IFRS 9 – Financial Instruments
    • IFRS 15 – Revenue from contracts with customers
    • IFRS 16 – Leases
  • Effect on key benchmarks such as operating profit, EBITDA, Debt and Net Assets

Course Types

In house courseIn house
Face to Face courseFace to Face
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12. Negotiating finance agreements in the context of applying the New UK GAAP

Objectives

The main aims of the session are to provide a practical understanding of how the New UK GAAP will impact finance transactions with particular focus on facility agreements and financial covenants.

Content

  • Overview of the new UK GAAP framework (focus will be on FRS 102)
    • Choices available to entities
    • FRS 102 Financial Reporting Standard applicable in the UK and Republic of Ireland
    • FRS 101 Reduced disclosure framework
    • Choice of FRS 102 or FRS 101?
    • FRS 102
      • Key dates, timelines and date of transition
      • Transition balance sheet and first FRS 102 accounts
      • Important issues to be aware about:
        • Retrospective application”
        • Different accounting treatments
  • Overview of issues that will arise in finance transactions
    • Timeline when New UK GAAP will impact the drafting of financial covenants
    • Defining the “Accounting Principles” under the New UK GAAP
    • Use of ‘frozen’ versus ‘rolling’ GAAP and which may become more popular and when
    • Issues with ‘frozen’ GAAP clauses
    • Review of an example definition of consolidated earnings ‘EBITDA’ to identify accounting changes under new UK GAAP that may lead to the need for re-drafting or further scoping out of the definition to calculate the number in the same way as under old UK GAAP including how the reference to “Operating Profits” and “Exceptional items” may need to change
  • Definition of ‘interest’ and ‘debt’: Review of example definitions to identify accounting changes under new UK GAAP that may lead to the need for re-drafting and when reference is made to GAAP whether the accounting of such items have changed under the new UK GAAP in order to avoid any unintended consequences if GAAP is relied on.
  • Checklist of matters to consider
  • The session will be based on the firm’s standard facility agreement.

Course Types

In house courseIn house
Face to Face courseFace to Face
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13. Accounting issues relevant to loan agreements

Objectives

This session is tailored to the specific requirements of individual firms.

The aim of the session is provide interactive workshops on certain “complex” accounting topics that regularly are the subject of negotiation as part of a loan agreement. Using illustrative clauses and definitions, the participants have an opportunity to discuss how the accounting applies to the document and what accounting issues arise.

Content may include

  1. Defining “Group” and “Non-Group” and the basis on which this is decided under UK GAAP, IFRS and US GAAP and how this relates to definitions in the agreement
  2. Defining “Accounting Principles” and how the new UK accounting framework (including FRS 101 and FRS 102) fits in with the standard definitions in loan agreements
  3. The issue of Freezing the GAAP and the impact on accounting systems
  4. Accounting for financial instruments and in particular the use of hedge accounting
  5. Accounting for gains and losses on investment properties and tangible fixed assets
  6. Accounting for share based payments
  7. Accounting for pensions
  8. Dealing with Exceptional Items in the context of earnings (EBITDA), Cash Flow and Current Assets and Current Liabilities
  9. More complex adjustments in definitions – for example adjustments in the definition of Financial Indebtedness such as:
    • Dealing with de recognition
    • Dealing with items that may be either classified as debt or equity under the accounting rules and how this should be approached
    • Leases under UK GAAP, IFRS and US GAAP

Course Types

In house courseIn house
Face to Face courseFace to Face
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