JP Morgan - Credit Risk Management Analyst Interview Topics

JP Morgan - Credit Risk Management Analyst Interview Topics Flashcards What are the 3 main financial statements? Income StatementBalance SheetStatement of Cash Flowsincome statement shows companys revenues, costs, expenses, altogether yield the companys net incomebalance sheet shows a companys assets, liabilities, and equityCash Flow Statement starts with net income from the income statement and then adjusts for non cash expenses (add back depreciation/amortization) in order to calculate the companys ending cash balance.Typical Credit Analysis ratiosD/EInterest Coverage Ratio(EBIT or EBITDA/Interest Expense)Tangible Net worth RatioTotal Assets-total liabilities-intangible assetsFixed Charge coverage ratio(EBIT+FCBT)/(FCBT+i)Debt/EBITDADebt/CapitalDSC RNOI/Total Debt Service go back and remember how to do how ??? impacts the 3 financial statements see ibankingfaq How do you use the main valuation methods to conclude value?Try and calculate a value range with the main valuation techniques and basically try and triangulate the values found from each one to make a conclusion on what the value range looks like.(Might put more weight on 1 or 2 of the methods if you think they will give you a more accurate representation (use precedent for acquisitions and weight that more, etc)(for example if youre valuing a very unique company than maybe you dont trust your comps analysis as much and you can give more weight to the other valuation techniques) What is Credit AnalysisThe analysis and identification of risks wherein a potential for lending is observed by the banks to evaluate qualitative and quantitative metrics of their clients What is Beta?the measure of the riskiness of a stock relative to the broader market.Market has beta of 1.0so if stock expected to swing with the market at a 10% higher magnitude, than the Beta of its stock is 1.1(negatives for swinging less than the market does)***beta calculated as the covariance between stocks return and the market return divided by the variance of the markets return questions you might wanna ask the interviewer: 1. tell me about a recent deal youve worked on that you enjoyed2. what are the next steps from here?3. how have you enjoyed your experience so far with the firm? how long have you been here? has anything surprised you during that time?4. what do you do for fun?

How to calculate the market value of equity? MVE equals:Share price X # of shares outstanding Walk me through an LBO Analysis1. Make transaction assumptions: What is the purchase price and how will the deal be financed? Create a table of Sources and Uses (where Sources equals Uses).Uses = amount of money required to effectuate the transaction, i.e.equity purchase price, existing debt being refinanced, and transaction fees.Sources tells us from where the money is coming, i.e. new debt, existing cash that will be used, and equity contributed by private equity firm.Equity = difference between Uses (total funding required) and all of the other sources of funding.2. Construct "proforma" balance sheet.Change existing balance sheet of company to reflect the transaction and new capital structure; intangible assets, debt, and equity will be changed.3. Create integrated cash flow model for the company. Project the company's income statement, balance sheet, and cash flow statement for a period of time (usually 5 years).4. Make exit assumptions for private equity firm, i.e. sell company after 5 years at same implied EBITDA multiple at which the company was purchased. This allows us to calculate IRR = average annual compounded rate at which the PE firm's original equity investment grows (most important info). IRR allows us to back into a purchase price for the company.What factors drive M&A activity?motivating factors are to:1. create synergies and save on costs2. acquire new tech or product pipelines3. grow share in the market by removing a competitor4. buying a supplier or distributor to increase supply chain pricing power5.improve financial metrics and numbers The different Risk Teams at JP Morgan1. CIB and Wholesale North America Corporates:Work with client base of diversified industrial, consumer, healthcare, retail, tech, media, communications, power, natural resources, and other corporate clients2. Wholeale

Multinational Corporations:similar to #1, performing credit

diligence on an ongoing basis for north american subsidiaries of MNCs headquartered overseas as well as recommending credit decisions3. CIB and Commerical

Real Estate:client base of leading real estate, lodging,

gaming, homebuilding, and real estate services companies, working to maintain knowledge of developments across real estate sectors nationally and provide expertise

alongside them4. CIB Financial Institutions:client base of

leading asset managers, banks, broker dealers, hedge funds, insurance companies, municipalities, and specialty finance or other non bank financial institutions

Of the 3 financial statements, which do you think is the most important?Statement of Cash flows, especially for credit analysis.If were analyzing whether to extend a companies credit line or whether to extend one at all, its important to look through the companies cash flows in order to make certain that they have the capability to pay meet the debt obligations.Net income can be misleading given all of the non cash items and accrual accounting methods that take place that can distort what the actual capability to meet these debt obligations really might be What are some other possible valuation methodologies besides the main ones previously discussed?

Other valuation methods include:1. LBO Analysis2.

Replacement value3. Liquidation Value What is the Formula for Enterprise Value? Market value of equity (MVE) + debt + preferred stock + minority interest - cash.(MVE + D + P + minority interest - Cash) What are the 5 C's of credit?1. CharacterGeneral trustworthiness, credibility, and personality. Trying to lend to responsible people.Assessed through credentials, references, reputation, and interaction with lenders.2. Capacity (Cash Flow)The ability to repay back the loan through businesses cash flows.Assessed through debt/liquidity ratios, cash flow statements, credit score, and borrowing/repayment history3. CapitalHow much money is invested into a project by the business owner/management team to make sure they have enough skin in the game.Assessed by the amount of money they have invested themselves.4. ConditionsHow the business intends on using the loan and how that could be affected by economic/industry trends.Assessed by reviewing the competitive landscape, supplier and customer relationships, macro trends, industry trends, and making sure they can all be mitigated.5. CollateralAssets that can be pledged for security, acting as a backup source of assets to be used towards the loan repayment in case the borrower cant repay a loan.Assessed by reviewing the value of hard assets (PPE), as well as accounts receivables and inventory, and sometimes even the borrowers own home.Walk me through a DCF analysisBuild a, usually, 5 year forecast of unlevered FCF based on reasonable assumptions, calculate a terminal value with an exit multiple approach (OR use gordon growth model) and then discount all those cash flows to their present value using the companys WACC.1. Forecast the 3 financial statements based on assumptions about the business/industry in order to find the unlevered free cash flows (which is EBIT - taxes - CapEx + D&A - any increases in non cash working capital)2. Calculate the

Terminal Value:two methods: perpetual growth rate (gordon growth model) and exit multiplesIn gordon growth, the business is assumed to grow steadily forever (at like gdp or inflation growth)in exit multiple, the business is assumed to be sold based on a valuation multiple (such as EV/EBITDA), which is usually based on comparable

company analyses3. Find NPV:discount the forecasted

FCFs and TV back to the present year using a discount rate (WACC)(using xnpv in excel)From here an analyst should perform sensitivity analyses and scenario analyses to determine a reasonable range for of values for the business as opposed to arriving at a singular value Why cant you use EV/Earnings or Price/EBITDA as valuation metrics?EV is the value of operations attributable to all providers of capital, which is to say that its NOT dependent on the choice of capital structure.We must be consistent in using a capital structure neutral metric in the denominator if we use EV in the numerator (aka an unlevered metric) such as sales, EBIT or EBITDA which work because they do not include interest expense.Metrics like earnings do include interest and so are considered leveraged or capital