Credit Analysis Flashcards
Credit risk is…
the risk of loss caused by a counterparty or debtor’s failure to make a promised payment
Credit Analysis is…
the evaluation of credit risk
Credit Analysis Approaches (2)
Credit Rating
Credit Scoring (Multiple Discriminant Analysis (MDA) and Logit Analysis)
Main objective of credit analysis is to…
identify if the credit transaction is worthwhile for the firm
Credit raters (4)
Differ from other lenders
Have no direct financial involvement with companies whose credit they are rating
Have access to more, better and most current information
Can refine risk analysis across industries
Credit analysts assess… (3)
macroeconomic, industry and firm-specific information
chance of default and ultimate payment in the event of default
provide ratings on both debt issues and issuers
If a company has no debt, a rating agency can also provide…
credit rating that expresses an opinion of the issuer’s overall capacity and willingness to meet its financial obligations
Investment Grade Credit Ratings
S&P - Standard & Poor’s
* AAA, AA: High quality
* A, BBB: Medium quality
Moody’s
*Aaa: Highest grade
* Aa1, Aa2, Aa3: High grade
*A1, A2, A3: Upper-medium grade
*Baa1, Baa2, Baa3: Medium grade
Non-investment grade (speculative)
S&P
*BB, B, CCC, CC: Low-credit quality
*D: bonds in default
Moody’s
* Ba1, Ba2, Ba3: Speculative elements
* B1, B2, B3: subject to high credit risk
* Caa1, Caa2, Caa3: bonds of poor standing
*Ca: highly speculative or near default
*C: lowest quality, typically in default
Credit ratings affect… (4)
cost of debt
* increase interest expense
* may limit new investment projects
* can restrict growth
Certain investors will not invest in their debt if…
it is considered non-investment grade
How do you interpret the original altman score?
Z > 3 = healthy, low bankruptcy potential in short term
2.99 > Z > 1.8 = gray, company exposed to some risk of bankruptcy, caution advised
1.8 > Z = company is in financial distress, high bankruptcy potential in short term
How do you interpret Taffler (1983) Z-Score Model?
Z < 0 = risk of failure
Z > 0 = financially solvent
How do you interpret Zmijewski (1984) X-Score Model?
X > 0 = firm has the potential to become bankrupt
X < 0 = firm does not have the potential to become bankrupt
Original Ohlson Model provides…
y, which is then used in the probability of bankruptcy calculation
