Credit Analysis Flashcards
What are four C’s of credit
Character (of the issuer - ^corp gov)
Covenants (affirmative/negative)
Collateral (security backing debt)
Capacity (CF, liquidity)
List three credit risks
Default risk
Credit spread risk (^spread, v value)
Downgrade risk (v rating = v price)
Key profitability ratios
ROE = NI / equity
= NI/sales * sales/assets * assets/equity
Liquidity ratios
Quick = curr assets - inventory
———————
Current liabilities
Current = current assets
—————-
Current liabilities
Leverage ratios
LTD-to-cap = LT debt
———————
LTD + min int + sh equity
Coverage ratio
EBIT coverage = EBIT
————–
Annual int exp
How to calc funds from operations
Net income
+ depreciation
+- other non cash items
= funds from operations
How to calc operating cash flow (S&P)
Funds from operations
+ decrease (increase) in non cash current assets
+ increase (decrease)
= operating cash flow
How to calc free op cf
Op cash flow
- capital expenditures
= free operating cash flow
How to calc discretionary cf
Free operating cash flow
- cash dividends
= discretionary cash flow
How to calc prefinancing cash flow
Discretionary cash flow - acquisitions \+ asset disposal \+ other sources (uses) = prefinancing cash flow
S&P CF ratios
Funds from ops / total debt
Funds from ops / cap spending req’t
FOCF + int / int
Debt service coverage
Int + annual principal repayment
Debt payback period
Discretionary cash flow
Key considerations for high yield corp bond issuers
Corporate structure - analyze sub cf and parent company
Debt structure - existing bank debt means floating rate (multi scenario), short term, senior
Focus on these four areas when assessing asset backed securities
Collateral quality Servicer quality (like an agent) Cash flow stress/payment structure Legal structure (SPV keeps collateral away from other creditors)
What are two types of municipal bonds and what to analyze for each
Tax backed debt - look at debt structure, budgetary policy, local tax availability, socioeconomic enviro
Revenue bonds - specific project - depends on adequate cf and reliable bond covenants
What is sovereign debt and two risks
National govt debt - local and foreign currency rating
Economic risks (ability to pay) Political risks (willing to pay)
Two most important factors in assessing corporate issuers
Capacity to pay. (Cash flow)
Corporate governance structure
