Investing Across the Capital Structure

A Holistic Approach to Firm Valuation The Credit Suisse HOLT™ Methodology of conversion of accounting to cash, inflation adjustments to assets, and proprietary net cash receipt forecasts offer an advantage in understanding enterprise value. The framework takes a holistic approach to total firm value, allowing a more intelligent debate regarding the various claims on this value. As a result, HOLT provides a better platform to understand valuation across the capital structure.

Case Study:

For a hedge fund client who specializes in distressed securities, we analyzed and valued a large-cap technology company. We determined that recent improvements in returns had been driven by higher operating margins. Other companies within the same industry had pursued the opposite strategy of much lower margins offset by higher asset efficiency. We concluded that the major risk to the story was a threat to margins posed by low margin-high turn competitors.

• The HOLT™ Framework provided insight into the level of EBITDA margins implied in the current enterprise valuation.
  
• We used EBITDA margins as a starting point and were able to quickly perform sensitivities on levels of margins that began to threaten liquidity.
  
• The cushion was sufficient, supporting the valuation of the bonds.
  

Case Study:

A large industrial company's principle manufacturing business was struggling. Its financing arm's performance was quite strong, however. Both equity and fixed income investors struggled to quantify the value locked within the finance company.

• HOLT was able to analyze and value the finance subsidiary as a stand-alone entity under various assumptions, leveraging our global benchmarking capabilities.
  
• Our analysis gave investors a framework to better understand the profitability and enterprise value of both entities independently, suggesting that one's credit had widened too much relative to the other's.
  
• This highlighted a profitable trading opportunity.
  

Case Study:

A director of research at a large mutual fund client wanted to drive greater communication between his equity and credit analysts. Furthermore, the client's various portfolio managers needed a common template to compare, contrast, and evaluate the forecasts being generated by both sets of analysts.

• The HOLT™ Valuation Framework delivered a common modeling platform that allowed comparability between the analysts' individual forecasts.
  
• The platform also provided plausibility checks when viewed in the context of actual cash returns over time. From these forecasts, equity and credit valuation statistics were generated and presented in a consistent manner useful to all portfolio managers, regardless of asset class or style.
  
• Lastly, the HOLT™ Valuation Framework offered the ability to screen against variables important to both equity and credit investors, allowing the client to identify opportunities with investment characteristics appealing on any or all of these criteria.
  

Case Study:

In a screen for ideas where expectations diverged among various asset classes, a large cap consumer company stood out. Its credit default swap spreads were widening, and implied volatility in the options was increasing. The equity price remained stable, however. We highlighted the company as one where credit and options markets were clearly concerned about a risk not being reflected in the equity price. The subsequent week, the company missed earnings expectations and the shares traded down substantially on the news.

• HOLT was able to use its unique global database to hone in on a handful of interesting ideas for investors across asset classes.
  
• We were able to incorporate multiple market signals to highlight an anomaly.
  
• The anomaly was subsequently recognized in the marketplace presenting a profitable trading opportunity.
  

Case Study:

Investors often look beyond current operation results in situations where certain assets are understated on the balance sheet. In one specific case, investors felt a company's real estate holdings warranted a premium to current operating cash flow. HOLT was able to use its embedded expectations framework to value the operations in an objective cash flow manner. This provided a framework to understand how much value needed to be realized from the real estate portfolio in order to justify current enterprise value. The benefit to clients was an objective view on the market's expectations for the company's enterprise valuation independent of and including the real estate play.

• HOLT used its "Green Dot" to understand enterprise value independent of real estate.
  
• We were able to then imply an embedded land value.
  
• This presented a useful framework to understand overall market pricing for the debt and equity.