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R44. FUNDAMENTALS OF CREDIT ANALYSIS -Evaluating credit quality- - Coggle…
R44. FUNDAMENTALS OF CREDIT ANALYSIS
-Evaluating credit quality-
Financial ratio use in credit analysis
Ratio analysis is part of capacity analysis
Credit analysts calculate company ratios to assess the viability of a company, to ϐind trends over time, and to compare companies
to industry averages and peers
Profits and Cash Flows
are needed to service debt. Here we examine four proϐit and cash
ϐlow metrics commonly used in ratio analysis by credit analysts
EBITDA
Calculation:
operating income plus depreciation and amortization
Drawback: not included Capex ( capital expenditures). Vì Capex là điều cần thiết để duy trì vận hành, và tiền này ko dành cho bondholders
Fund from operating (FFO)
Calculations: net income from continuing operations plus depreciation, amortization, deferred taxes, and noncash items.
FFO is similar to cash ϐlow from operations (CFO) except that FFO
excludes changes in working capital
Free cash flow before dividends
Calculations
Net income + depreciation/ Amortization - Capex + WC
Free cash ϐlow before dividends excludes nonrecurring items
Free cash flow after dividens
Calculations: Free cash flow before dividends - dividends
If CF >0, it represents cash that could pay down debt or accumulate on the balance sheet => outcome của CF >0, deleveraging (xóa nợ), tăng tin nhiệm (creditworthiness)
Leverage Ratios
:
Nên điều chỉnh một số yếu tố nghĩa vụ của doanh nghiệp như net pension liability, off- balance sheet as operating lease
Debt/ Capital
Capital is the sum of total debt and shareholders’ equity
The debt-to-capital ratio is the percentage of the capital structure ϐinanced by debt
Nếu có goodwill , an analyst should calculate a second debt-tocapital ratio adjusted for a write-down of these assets’ after-tax value
Debt/ EBITDA
A higher ratio indicates higher leverage and higher credit risk
Nếu là cty có tính chu kỳ (cyclical industry) thì càng dễ biến động (more volatile) because of their high variability of EBITDA
FFO/Debt
Because this ratio divides a cash ϐlow measure by the value of debt, a higher ratio indicates lower credit risk
FCF after dividends/ debt
Greater values indicate a greater ability to service existing debt
Coverage Ratios
measure the borrower’s ability to generate cash ϐlows to meet interest
payments
higher ratio indicates lower credit risk
EBITDA/ Interest expense (được dùng nhiều hơn EBIT/ interest expense)
EBIT/ interest expense
2. Factors affect the level and volatility of yield spread
the yield on an option-free corporate bond included: the sum of the real risk-free interest rate, the expected inϐlation rate, a maturity premium, a liquidity premium and credit spread
Tất cả các trái phiếu đều chịu ảnh hưởng của 3 yếu tố đầu
2 yếu tố sau là yield spread= liquidity premium + credit spread
Yield spreads on lower-quality issues tend to be more volatile than spreads on higher quality issues.
Yield spreads on corporate bonds are affected primarily by ϐive interrelated factors:
Credit cycle
Ảnh hưởng đến credit spread được thu hẹp lại nếu credit tycle đc improve và ngược lại
The market’s perception (sự nhận thức) of overall credit risk is cyclical
Đỉnh của credit risk, thì mn sẽ nhận thấy low credit risk và thường tăng giá
Economic conditions:
Ảnh hưởng đến credit spread
Credit spreads narrow as the economy strengthens and investors expect ϐirms’ credit metrics to improve. Conversely, credit spreads widen as the economy weakens.
Broker-dealer capital:
Vì khi giao dịch thỏa thuận, nhà đầu tư cần một tôt chức broker- dealer capital để thị trường trái phiếu hoạt động
Yield spreads are narrower when broker-dealers provide sufϐicient capital but can widen when market-making capital becomes scarce (khan hiếm).
General market demand and supply
Ảnh hưởng đến credit spread
Tùy thuộc vào nhu cầu thị trường, nếu thị trường có nhu cầu cao (high demand) thì sẽ làm hẹp (narrow) credir spread và ngược lại
Issuer’s financial performance
Tăng trưỏng dương ( development that are positive) sẽ làm hẹp yield spread và ngược lại
3.
evaluating the credit of high-yield, sovereign, and non-sovereign government debt issuers and issues
High Yield Debt
( noninvestment bonds/ junk bonds) are rated below Baa3/ BBB with higher perceived credit risk
Reason for noninvestment grade: Đòn bẩy cao, Không có lịch sử phát triển rõ ràng, dòng tiền âm hoặc thấp, ngành kém phát triển có tính chất suy thoái, bị ảnh hưởng mạnh bởi chu kỳ kinh doanh,...
Liquidity
: Liquidity or availability of cash is critical for high yield issuers.
Có 6 nguồn để đánh giá tính liquidity: BS, WC, CFO - Operating cash flow, Bank credit, Equity issued and sales of assets
Phân tích liquidity quan trọng vì: high yield debts có 1 số hạn chế khi vay như không đc vay thêm khi thiếu vốn dễ dẫn tới vỡ nợ. Ngoài ra thì các tổ chức high yield financial firms có đòn bẩy cao ( vay nợ cao) và tài trợ ở tài sản dài hạn từ vay ngắn hạn thì phân tích liquidity rất quan trọng
Financial projection
Projecting future earnings and cash ϐlows, including stress scenarios and accounting for changes in capital expenditures and working capital, are important for revealing potential vulnerabilities to the inability to meet debt payments
Debt Structure
: often include different types of debt with several levels of seniority and hence varying levels of potential loss severity.
Capital structures typically include secured bank debt, second lien debt, senior unsecured debt, subordinated debt, and preferred stock
calculate leverage for
each level of the debt structure
when
an issuer has multiple layers of debt with a variety of expected recovery rates.
Top heaven:
High yield companies for which secured bank debt is a high proportion of the capital structure => khó vay từ bank nếu trong thời gian khủng hoảng của công ty. Những công ty này dễ vợ nợ và có lower recovery rates for unsecured debt issues.
Corporate Structure
Many high-yield companies use a holding company structure. Công ty con trả cổ tức cho cty mẹ, cty mẹ dùng tiền này để trả nợ nhu dòng tiền hoạt động. Khi số này không đủ trả cho các khoản vay, thì làm giảm recovery rate đối với người nắm giữ trái phiếu của công ty mẹ.
Despite structural subordination, a parent company’s credit rating may be superior (cao hơn) to subsidiaries’ ratings vì công ty mẹ có nhiều nguồn tiền hơn
Đôi khi có một số corporate structure phức tạp hơn khi có 1 công ty trung gian sỡ hữu dưới 100% và phát hành các khoản nợ. Việc này là kết quả của việc mua bán, sát nhập và mua từ vay (leveraged buyout)
Khi một công ty con vỡ nợ không gây ra các công ty con khác vỡ nơ hay công ty mẹ. Khi này cần phân tích kĩ hợp đồng và các chứng từ pháp lí khác để có cái nhìn toàn diện
=>
analysts should calculate leverage ratios at each level of debt issuance and on a consolidated basis
Convenants
Important covenants for high yield debt include
Change of control put.
Cho phép debts holder có quyền yêu cầu mua lại nếu bị sát nhập. (Đối với investment grade bonds chỉ xảy ra khi sự kiện sát nhập làm giảm investment grade.
Restricted payments
: The covenant protects lenders by limiting the amount of cash that may be paid to
equity holders
Limitations on liens
(quyền cầm giữ)The covenant limits the amount of secured debt that a borrower can carry.
Unsecured debt holders prefer the issuer to have less secured
debt, which increases the recovery amount available to them in the event of default
Restricted versus unrestricted subsidiaries
: Có thể phân loại công ty là restricted subsidiaries ( dùng tiền và tài sản để trả nợ cho công ty mẹ) và unrestricted subsidiaries. => làm có lơi cho chủ nợ của công ty mẹ vì thay vì là subordinate nhưng giờ có thê là pari passu ( have the same priority claim with senior debt)
Tax and regulatory issues can factor into the classiϐication of subsidiary’s restriction status. A subsidiary’s restriction status is found in the bond indenture
Sovereign Debt
issued by
national governments
Sovereign credit analysis must assess both the government’s ability to service debt and its willingness to do so
A basic framework for evaluating and assigning a credit rating to sovereign debt includes five key areas
Institutional assessment:
includes successful policymaking, minimal corruption, checks and balances among institutions, and a culture of honoring debts
=> tính chất của viện phát hành
Economic assessment:
includes growth trends, income per capita, and diversity of sources for economic growth
External assessment
includes the country’s foreign reserves, its external debt, and the status of its currency in international markets
Fiscal assessment
: includes the government’s willingness and ability to
increase revenue or cut expenditures
to ensure debt service, as well as trends in debt as a percentage of GDP
Monetary assessment
includes the ability to use
monetary policy
for domestic economic objectives and the credibility and effectiveness of monetary policy
Credit rating agencies assign each national government two ratings: (1) a
local
currency debt rating and (2) a
foreign
currency debt rating
Foreign: higher defalut risk và có lower credit rating so với local
Sovereign defaults can be caused by events such as war, political instability, severe devaluation of the currency, or large declines in the prices of the country’s export commodities
Non-Sovereign Government Bonds
is issued by local governments (cities, states, and counties) and quasi-governmental entities
Municipal bonds
are a signiϐicant part of the overall U.S. bond market. Có 2 dạng của municipal bonds
general obligation (GO) bonds
:
unsecured bonds backed by the full faith credit of the issuing governmental entity, which is to say they are supported by its taxing power
Evaluating :
*Economic factors included employment, trends in per capita income and per capita debt, tax base dimensions (depth, breadth, and stability), demographics, and ability to attract new jobs (location infrastructure)
*observe revenue variability through economic cycle Relying on highly variable taxes that are subject to economic cycles, such as capital gains and sales taxes, can signal higher credit risk
*reporting không thống nhất cũng là vấn đề
*Các nghĩa vụ khác như underfunded pensions and post- retirement benefits
Revenue bonds:
are issued to ϐinance speciϐic projects, such as airports, toll bridges, hospitals, and power generation facilities
Higher
credit risk than GO vì nguồn thu chỉ duy nhất là dự án
Phân tích: phân tích dự án, phân tích nguồn tài trợ và phân tích kỹ thuật như phân tích corporate bond