I was always talking about the fact that I want to work in a finance related job like analyst in a bank etc. However, I realized that "finance related job" was too broad definition for a career plan. Whats worse was that I didn't know what people are doing in these "finance related jobs".
So I decided to discover my dream jobs from the emplyees' perspective to see whether they match with my skills and personality. I followed the virtual internships in Forage. For the ones who do not know Forage, Forage is a platform where you can get virtual work experience programs from top companies. What is even more interesting is that it is totally free.
Today I want to summarize the things that I learn from HSBC's Global Banking & Markets Virtual Experience Programme.
1- Identify M&A targets for offshore expansion
Here we are given some information about a company which aims to achieve growth by acquiring another firm which is an example of inorganic growth. To explain, organic growth is generated by executing on internal initiatives like business development to increase output wheras inorganic growth is generated by external activities such as mergers and acquisitions (M&A) which was the given case actually. So the aim was generating critera to filter potential target companies then recommend one company which we think the best. Important steps can be listed as:
Learning about the company is crucial step since knowing companys' objectives can help to identify best target company by comparing with those companies' objectives and strategies. We can learn about a company by constructing a Company Profile. Company Profile includes company overview, geographical locations, financial summary, company strategy (expansion to multiple countries, increasing margins by reducing unit costs via economies of scale etc.) The important thing at this step is clear understanding of companys' objectives and current situation.
Criteria(Filter) selection: One should decide on which criteria should be used to asses target companies. These criteria should be the indicators of companys' objectives. Relative size, Location, Complementary Focus, Ownership Approachability can be such examples. For example if target company's relative size is too larger than acquirer company than it is not desired or maybe acquirer company wants to enlarge its operation to some specific location so we expect target company to operate at this location and so on. Another point was that in this case of HSBC, size assesment were measured by looking at revenue and EBITDA.
Analysing target companies according to criteria and choosing the best one. It is important to look for the facts which will accelerate integration. While making decision, weighted average of criteria can be used if visual representation is not so obvious. Each companys can be graded from 0-10 by criteria, 0 meaning worst fit and 10 for best then criteria can be given weight denoting importance then the company giving highest result can be used. In the HSBC's case, visual representation was enough and decision was clear since one company outweigh others in nearly all criteria.
2-Create a debt market update
Analysing transaction data to develop a summary of debt capital markets (DCM) activity. DCM is basically raising fund by issuing debt instruments to investors. Usually companies and governments raise these funds then issuers repay the amount they borrowed plus interest. HSBC's DCM team's responsibility is advising issuers on these operations and connecting them with debt investors. One thing that is needed to be done in banks like HSBC is to provide market updates in the form of short presentations. By looking at these updates companies can get insight about current investor appetite for debt instruments, debt pricing trends and which markets may be better suited to certain companies over others. Having this update is advantageous for the bank as well since the bank can may consider raising new debt, refinancing or restructuring existing debt. In HSBC's case this update was for Corporate Senior Bond Market and was including graphs for Monthly Issuance Volumes (EUR/GBP), Breakdown by Ratings (%Issuance), Breakdown by Tenor (Maturity) (%Issuance).
3-Analyse a debt financing opportunity
Identifying the key strengths and weaknesses of a debt financing transaction. The Corporate Banking team have a pivotal role to play in analysing whether a potential debt financing makes sense financially, and ultimately whether HSBC should provide credit to the company. Both qualitative (e.g. target,sector risk etc.) and quantitative factors (e.g. borrowers financial situation,revenue growth,earnings margins etc.) play important role in decision-making. Team typically forms due diligence reports since they are responsible for bank's exposure to risk. One important thing that I learned is that acquirer company proposes an acquisition price by taking EBITDA (5*EBITDA in that specific case) Then acquirer decide on how much of this transaction will be with debt. Then bank decide whether take this money or not by considering two benchmark: (i) the Net Leverage Ratio and (i) the Interest Coverage Ratio.
Net Leverage Ratio=Net Debt/EBITDA (what is your level of indebtness per earnings)
Interest Coverage Ratio =EBIT/Net Interest Expenses (would you be able to cover your expenses with you operating income
In the case of HSBC they have adopted an internal benchmark of <5x for the Net Leverage Ratio and >2x for the Interest Coverage Ratio. Well, lets say a company passed these tests then bank should foresee strengths and risks associated with the debt financing transaction. To understand this bank should evaluate financial analysis of deal as well as synergies between two company and current situation in market or in sector.
Some strengths can be target company's financial health and its position compared to its competitors, financial forecasts of company, company's future strategies and so on. For example expanding margins is a good sign and can be seen as strength. Other strengths can be revenue synergies, expecting successfull cross-selling etc. as well as cost synergies. Also expectation of growth in related market can be strength.
However, we can not be sure about synergies there exists a rik that acquirer company's credit metrics (Net Leverage Ratio and Interest Coverage Ratio) will be adversely impacted. CEO change in acquired company can be another factor that is adding risk. We previously said that if market is poised for growth then it is strength, however, it can also result with competition since many company would see this growth and react, this may cause decrease in demand. If you can mitigants for your risks then it is still good.
4-Identify a trading opportunity
Suggest a trade idea by performing a simple analysis in Excel. Before explaining I do suggest you to do this task in Forage If you want to learn it deeper since I am not going to explain hole excel sheet. Nevertheless, idea was: given a situation, find the best trade idea. In the case situation was " Market participants, however, are wary of the next black swan event and assets start to fall as sentiment changes from risk-onto risk-off." I want to summarize the strategy for choosing the best among given trades(long gold, short S&P500 index,Short USD/JPY, Long US Government Bonds)
With huge assumption, we can look for trendline between pairs of those trades. For example we can plot Bond vs Gold, fit a line then for the points above line classify as overpriced, and underpriced if below etc. To see whether such claim makes sense we can look at correlation (R). If close to 1 then we can say these two goes in same direction. R also refers to how well line-of-best-fit fits the data. We can find slope and intercept of this line as well. Finding slope and intercept requires to find residual of course. If you dont know what I am talking about I suggest you to go and find statistics book. We can find the residual in % by residual/price. Now for each trade ıption we can find weighted average of %residuals, where weights are equal to correlations R. This number indicates how under/over priced the asset is. For example I found 9.9 for S&P500 index which means on average and relative to the other assets, the S&P500 is a 9.93% sell. It is a sell option since we do not want to hold an asset that is overpriced. (If overpriced it will go back to what it deserves which means loss). Now those averages will be our reward but there is important point is that we need to consider the trade. For example for S&P500 I had %9.9 , If I sell it I will protect myself from that muck loss so it is a reward for me, if I buy S&P500 then my reward will be -%9.9. S this is how you find reward. Then we can also find standard deviation and volatility of assets by using simple excel functions then divide reward by volatility. We do this to adjust our reward to risk (risk-adjusted reward=Reward/Volatility) Then we choose best value among all trade options
5-Find the right product for a client
Match financial products with different clients
Corporates with spare cash on the balance sheet -->Low Risk
Currency including USD; GBP; AUD; JPY; HKD; CNY; EUR; SGD
Precious metals commodities including gold; silver
Australian ASX listed blue chip equities
Hedge fund clients seek high returns on investment -->High Risk
LATAM AgriBusiness OTC Options
Industrial commodities including rubber; steal; lumbe
6-Improve a trade process
Create a flow chart for an improved trade process.
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