Book 4_Fixed_READING 64_CREDIT-ANALYSIS-FOR-CORPORATE-ISSUERS

Question 1

Qualitative factors that imply a corporate issuer has high creditworthiness

Answer 1

• Having a stable business model,
• Being in an industry with low levels of competition,
• having low business risk,
• having adequate corporate governance

Question 2

Quantitative factors that imply a corporate issuer has a high creditworthiness

Answer 2

• Strong profitability and recurring revenues,
• low leverage, high coverage ratios,
• high levels of liquidity

Question 3

Credit analysts use these ratio to assess debt issuers’ capacity:

Answer 3

• Profitability => EBIT margin (EBIT / revenue).
• Leverage: debt to EBITDA and retained cash flow to net debt
• Coverage ratios: EBIT to interest expense

Question 4

Retained Cash Flow (RCF)

Answer 4

= Operating cash flow minus dividends

Question 5

Corporate debt is ranked by

Answer 5

seniority or priority of claims

Question 6

Secured debt

Answer 6

• is a direct claim on specific firm assets and has priority over unsecured debt.
• Secured or unsecured debt may be further ranked as senior or subordinated

Question 7

Priority of claims may be summarized as follows:

Answer 7

1. First lien/mortgage
2. Senior secured (second lien)
3. Junior secured
4. Senior unsecured
5. Senior subordinated
6. Subordinated
7. Junior subordinated

Question 8

Issuer credit ratings, or corporate family ratings (CFRs)

Answer 8

reflect a debt issuer’s overall creditworthiness and typically apply to a firm’s senior unsecured debt

Question 9

Issue credit ratings, or corporate credit ratings

Answer 9

• Reflect the credit risk of a specific debt issue.

Question 10

Notching

Answer 10

• Refers to adjusting an issue credit rating upward or downward from the issuer credit rating
• Refers to the credit rating agency practice of distinguishing between the credit rating of an issuer (generally for its senior unsecured debt) and the credit rating of particular debt issues from that issuer, which may differ from the issuer rating because of provisions such as seniority

Question 11

Credit risk comparison

Answer 11

• Secured collateral implies lower credit risk compared to unsecured debt,
• Higher seniority implies lower credit risk compared to lower seniority.