Credit analysis Flashcards
What do the credit rating agencies do?
Rating agencies are supposed to help provide trust and confidence in financial markets by rating borrowers on their creditworthiness of outstanding debt obligations. They can, however, run into conflicts of interest and should not be blindly relied on for assessing a borrower’s risk profile.
How would you decide if you can lend $100 million to a company?
Review all three financial statements for the past five years and perform a financial analysis. Determine what assets can be used as collateral, how much cash flow there is, and what the trends of the business are. Then look at metrics such as debt to capital, debt to EBITDA, and interest coverage. If all of these metrics are within the bank’s parameters, then it may be possible to lend the money, but the decision will depend on qualitative factors as well.
What is London Inter-Bank Offered Rate (LIBOR)?
The London Inter-bank Offered Rate (LIBOR) is a benchmark interest rate at which major global banks lend to one another in the international interbank market for short-term loans.
LIBOR, which stands for London Interbank Offered Rate, serves as a globally accepted key benchmark interest rate that indicates borrowing costs between banks. The rate is calculated and published each day by the Intercontinental Exchange (ICE).
What is Euribor?
Euribor is short for Euro Interbank Offered Rate. The Euribor rates are based on the interest rates at which a a panel of European banks borrow funds from one another.
What is Free Cash Flow?
In simple terms: Free cash flow is simply equal to cash from operations minus capital expenditures
What are the most common credit metrics banks look at?
The most common credit metrics include debt/equity, debt/capital, debt/EBITDA, interest coverage, fixed charge coverage, and tangible net worth.
What is High Yield Bonds?
A high-yield bond is a high paying bond with a lower credit rating than investment-grade corporate bonds, Treasury bonds and municipal bonds. Because of the higher risk of default, these bonds pay a higher yield than investment grade bonds. Issuers of high-yield debt tend to be startup companies or capital-intensive firms with high debt ratios.
High-yield bonds carry a rating below “BBB” from S&P
What is a Bond?
A bond, also known as a fixed-income security, is a debt instrument created for the purpose of raising capital. They are essentially loan agreements between the bond issuer and an investor, in which the bond issuer is obligated to pay a specified amount of money at specified future dates.
What is Floating Rate Notes?
A floating-rate note (FRN) is a debt instrument with a variable interest rate. The interest rate for an FRN is tied to a benchmark rate. Benchmarks include the U.S. Treasury note rate, the Federal Reserve funds rate—known as the Fed funds rate—the London Interbank Offered Rate (LIBOR), or the prime rate.
Floating rate notes or floaters can be issued by financial institutions, governments, and corporations in maturities of two-to-five years.
What is Senior Loans?
A senior bank loan is a debt financing obligation issued to a company or an individual by a bank or similar financial institution that holds legal claim to the borrower’s assets above all other debt obligations. Because it is considered senior to all other claims against the borrower, in the event of a bankruptcy it will be the first loan to be repaid before any other creditors, preferred stockholders or common stockholders receive repayment.
What is a Special Situation?
A special situation refers to particular circumstances involving a security that would compel investors to buy the security based on the special situation, rather than the underlying fundamentals of the security or some other investment rationale. This type of investment is an attempt to profit from a potential rise in valuation that the special situation presents. There could be a near-term catalyst to quickly gain from the resolution of a special situation, or it could take many months or years.
Special situation investment opportunities can take many forms and involve multiple asset classes. Typical special situations can arise from spinoffs, tender offers, mergers and acquisitions, bankruptcy or distress, litigation, capital structure dislocations, activism, or just complexity that the market does not understand.
What is a Sub-investment grade loan?
lso known as speculative grade debt. A loan made to a borrower with a poor credit rating. A borrower’s credit rating is determined by a rating agency or, in some cases, more than one agency.
Standard & Poor’s ratings for sub-investment grade loans range from ‘BB+’ to ‘D’.
What is Privat Debt?
The term ‘private debt’ is typically applied to debt investments which are not financed by banks and are not issued or traded in an open market, while the word ‘private’ refers to the investment instrument itself and not necessarily the borrower – i.e., public companies can borrow via private debt just as private companies can. Private debt falls into a broader category termed ‘alternative debt’ or ‘alternative credit’, and is used interchangeably with ‘direct lending’, ‘private lending’ and ‘private credit’.
Within the private debt market, investors lend to investee entities – be they corporate groups, subsidiaries or special purpose vehicles established to finance specific projects or assets – in the same way that banks lend to such entities. Private debt investments are typically used to finance business growth, provide working capital, or fund infrastructure or real estate development.
What is distressed debt?
Distressed debt refers to the securities of a government or company which has either defaulted, is under bankruptcy protection, or is under distress and moving towards the aforementioned situations in the near future.
The greater the level of risk you assume, the higher the potential return. Distressed debt sells at a very low percentage of par value. If the once-distressed company emerges from bankruptcy as a viable firm, the once-distressed debt will sell for a considerably higher price. The potential for high returns attracts investors, particularly investors such as hedge funds.
What is Leveraged Loans?
A leveraged loan is a type of loan that is extended to companies or individuals that already have considerable amounts of debt and/or a poor credit history. Lenders consider leveraged loans to carry a higher risk of default, and as a result a leveraged loan is more costly to the borrower.
