FRM Flashcards
T8
what things can affect the credit ratings ?
-people not being honest , manipulation
-countires rating can be affected by politics e.g Russia
T8
Factors that would usually be considered in a credit rating
- startles industry risk
-diversifcation size
-profit
-cashflow and balance sheet
Factors related to bonds that can influence credit rating
-covernants attached to bonds
-bond seniority (if broke will they get paid first )
-maturity dates and coupons
-marketablitlty / liquidity of the bonds
T8
what is covenants ?
rules that protect investors in case a borrowing company can and can’t do .if they break the agreement can lead to consequences .
Included interest cover ,gearing , net debt
T8
what can if happen is a covenants is broken ?
ask for more money back or they face penalties ,which can lower credit rating .
-higher interest
T8
rating commentary (what can make credit rating changed )
net debt
financial
finical policy target
business risk
T8
how improve credit worthyness?
reduce borrowing
reducing dividends
internal cash generating
tighter covenants
T8
If credit rating falls what can happen .
no access to paper market
breach of covenants
loss of reputation
harder to borrow
impact relationshipbanking
T8
do all companies want a high credit rating
no not all companies as they dont borrow as much
T8
What are the ranking of credit rating and what different borrowings?
AAA TO EVEN D
moody longterm A-C
STANDdrad &poor A-D
flitch /ABCA A-C
T8
why are credit ratings needed? And what is an agency?
To see how trustworthy the company is at repaying debts and how likey they are to pay that back . They agency are the ones who can give you a credit rating , not biased.
T8
what is corporate and municaple bond ?
c bond is the company sells bonds investor can rise capital
municaple bond is bonds issued by government to raise founds for hospitals and schools
T8
In what way can credit ratings
affect a company ?
it can affect there credibility and publicity
T8
how would a foreign investor be able to identify a good investment ?
If they don’t know the company they can still identify the rating .everyone can understand or they can go to a third party
T8
What do investors earn form company when investing
- repayments in full
-can earn intrest
-
T8
what’s the rating process ?
w0 chose a rating agency
w1-2 questionnaire to issuer
w2-3 questionnaire complete & plan meeting
w4 meeting
w5 respect report
w6-7 rating decided
w7 given rating
What is refinancing and what are the risks ? And solutions
Refinancing is a debt thats going to mature , so you get another loan to pay that off
Risks are default , can be more at risk depending on short term loans
Asking for long term loans
Swaps from floating to fixed
Selling some assets , debtors colletions
What is Sovereign risk , strategic and business risk , management quality, financial factors, relationship with credit rating agency, bone specific issues
Sovereign risk -
Is about countries credit rating . The amount of debt a countries has can make the downgrade which can make them have to increase the interest as it’s seen as a risk for global investors . Corporates also have to set there interest higher then the government because the gov is seen as more trustworthy
Strategic and business risk -
This risk arises from a company’s strategic decisions, like entering new markets or launching new products. It includes challenges such as competing with larger global companies and assessing potential opportunities versus risks.
Management quality-
Management quality ratings go beyond numbers, incorporating subjective factors like reputation and track record. A strong, trusted manager is seen as less risky compared to one with a weaker reputation.
Financial factors-
Financial factors assess a company’s health, like free cash flow, ability to pay debt, and profitability, to understand its stability and risks.
Relationship with credit rating agency-
Credit ratings should be independent, but agencies might favor frequent issuers to secure future business.
Bond specific issues-
The bond prospectus provided to the rating agency details key information like security, coupon, and legal terms.
coverages in credit rating
Security of principles of debt repayment
Interest rate covered available
Issuer ability to generate sufficient income to meet interest and capital
The probability of default
The trade of theory suggests
Using tax savings, but too much debt to default
Limitations of Credit Rating
Lack of Transparency: The rating process is often unclear, reducing trust in the results.
Conflict of Interest: Analyst pay and incentives can compromise the integrity of ratings.
Infrequent Updates: Ratings do not adjust as often as default probabilities change.
Through-the-Cycle Approach: Ratings reflect long-term creditworthiness, ignoring short-term economic shifts that may impact default risk.
Rating Shopping: Issuers should not shop for favorable ratings or negotiate with agencies to influence outcomes.
