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16.0. Credit Analysis for Corporate Issuers - Coggle Diagram
16.0. Credit Analysis for Corporate Issuers
Factors affect to credit risk
Qualitative
(1) Business model
Business model with stable and preditable cash flows -> Higher credit quality. Changes in the business model -> Increase business risk
For longer-term debt issues, a credit analyst should consider both the
existing business model
and
any long-term changes
to it that the issuer will need to make to remain competitive
(2) Industry competition
Less intensive competition -> More favorable credit quality
Analysts need to consider any change in the competitive landscape over the long term
(3) Business risk
Lower risk of unexpected deviations from expected revenues and margins -> Higher credit quality
Business risk can orginate from issuer-specific, industry-specific, or external sources
(4) Corporate governance
Debt covenants and accounting policies
Types
Debt covenants
Unsecured investment-grade issuers
:
Primarily have affirmative covenants -> Assess the potential to issue additional debt that would dilute the claims of existing debtholders
High-yield issuers
:
Have negative covenants + affirmative covenants -> Assess the past actions of management whether any actions led to credit rating downgrades
Accounting policies
Aggressive
accounting policies
mask the performance and the risk
of the underlying business and are potential
warning flags
to the true character of the business and its leaders
=> Adversely impact an issuer's creditworthiness
Qualitaitve factors
Definition
The goal of quantitative analysis is to identify key factors that drive a corporate issuer's POD and how they change over the credit cycle, including the following factors
Characteristic
Strong operating profits
and recurring revenues
Low levels of leverage
and
less reliance on debt
in the capital structure
High coverage
of debt service payments with periodic incoem
High levels
of liquidity to meet short-term debt payments
Financial ratio in corporate credit analysis
Profitability: EBIT Margin = Operating Income / Revenue
Coverage: EBIT to Interest Expense = Operating Income / Interest Expense
Leverage:
Debt to EBITDA = Debt / EBITDA
RCF to Net Debt: Retained Cash Flow (RCF) / (Debt - Cash and Marketable Securities)
Seniority rankings, recovery rates, and credit ratings
Seniority rankings
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Recovery rate
Recovery rates can vary widely by industry
Recovery rates are usually lower for industries that are in
secular decline
compared to industries that are only experiencing a cyclical economic downturn
Recovery rates can also vary depending on when they occur in a credit cycle
Recovery rates are
usually lower at or near the bottom of a credit cycle
than at other times in the cycle
Recovery rates can vary greatly across companies within the same industry
Recovery rates are
tend to be lower-ranked debt
if a company has a relatively higher proportion of secured debt in its capital structure
Chú thích: Secular decline/increase: sự suy thoái hoặc tăng trưởng chỉ trong một ngành và không ảnh hưởng nhiều đến nền kinh tế chung
Credit ratings
Participant
Corporate family rating (CFR)
Based on overall creditworthiness of the issuer
Typically apply to the issuer's senior unsecured debt
Corporate credit rating (CCR)
Based on factor such as the issue's relative seniority ranking in capital structure
Apply to specific financial obligatin of the issuer
Provision
Cross-default
When there is
a default event
on any one bond issued by a company, a provisions in bond indentures
may trigger default on the remaining issues
as well -> Same default probability for all issues
Notching
Althrough cross-default, issuer ratings may differ due the LGD differences because of seniority, subordination, and sources of repayment -> Such rating adjustment methodolofy is known as notching
Mechanism: Rating agencies move credit ratings for specific issues up or down relative to the issuer rating
Mechanism
General rule
The higher the senior unsecured rating, the smaller the notching adjustment
For more risky issuers:
(Lower credit ratings)
A larger notching adjustment:
The probability of default is higher, so the potential difference in loss from a lower or higher seniority ranking is a bigger consideration in assessing the issue's credit risk
For less risky issuers:
(higher credit ratings)
A smaller notching adjustment
The probability of default is lower, so there is less of a need to notch ratings to capture any potential difference in loss severity
Factors affecting notching
Primary factor:
Probability of default
Secondary factors:
Seniority ranking
Potential loss severity
Structural subordination: cty con phải trả nợ nó trước khi đưa dòng tiền về cho cty mẹ. nếu cty sa sút, khả năng cty mẹ die chung :>>