L8 Flashcards
What are the two primary risks that need to be addressed - according to Fitch ratings
- operations, revenue and renewal risk
- debt structure
What is operations, revenue and renwal risk?
address the project’s ability to generate stable cash flow based on its legal framework and fundamental economics
Fitch will evaluate the operating cost, demand, revenue and infrastructure renewal risks
What is the debt structure risk?
assess protections in the transaction structure to ensure timely payment of debt service - encompasses an assessment of payment waterfall ranking, refinance risk, financial portfolio, covenant package, structural features, hedging financial risk, liquidity and reserves
What are some additional structures beyond operational and debt?
compleation and construction risk
structure -ownership and legal structure
macro risk
What are some key considerations when considering a risk mitigation tool or strategy?
- Aligned to objectives - does the tool support the analysis that is needed?
- support decision making - does the tool provide necessary information to clarify and not complicated?
- Accessibility - is the tool understandable by others
- availability of data
-level of detail - sufficiently granular?
What is the equation for P/E
Market price per share/earnings per share
How do you work out the EV/EBITDA multiple?
earnings before interest, tax and depreciation
What is the EBIT?
revenues - COGS - operating expenses
or
= net income + interest + taxes
measures the profit a company generates from its operations - often called the operating profit
focuses solely on a companies ability to generate earnings from operations ignoring the tax burden and cap structure
useful in cap intensive industries - where companies have a lot of fixed assets on their balance sheet - typically financed by debt = cap intensive industries tend to have high interest expenses due to a large amount of debt on their balance sheet
What is EBITDA?
net income + taxes + interest expense + depreciation and amortisation
or
operating income + depreciation and amortisation
used in valuation ratios in combination with EV/EBITDA
metric is used to evaluate a companies operating performance
can be seen as a loose proxy for cash flow from the entire companies operations
in cap intensive sectors, the costs that EBITDA excludes may obscure changes in the underlying profitability - this is a limitation
What is a liability?
A short term debt
a firms financial obligations that are expected to be paid off within a year
most common measure of short term liquidity is the quick ratio
What is the quick ratio?
a measure of short term liquidity
integral in determining a company credit rating that ultimately affects the company’s ability to procure financing
QUICK RATIO = (current assets- inventory)/ current liabilities
What is long-term debt?
Debt that matures in more than one year
often treated differently from ST debt
for an issuer - LT debt is a liability that must be repaid while owners of debt (bonds) account for them as assets
LT debt liability are a key component of business solvency ratios - analysed by a stakeholder and rating agencies when assessing solvency risk
What does the debt/asset ratio tell us?
ratio shows how much of a business is owned by creditors compared with how much of the company’s assets are owned by shareholders
