Liquidity Control and Credit Ratings

Question 1

What is profitability and liquidity?

Answer 1

Profitability; Measure of a company’s ability to generate income relative to its expenses.
Liquidity; Liquidity is a measure of how easily an asset or security can be converted to cash.

Question 2

What is Liquidity Management?

Answer 2

The management of working capital (borrowings and cash surpluses) for efficient cashflow management during the business’s WCC.

Question 3

What is a disaster plan?

Answer 3

Its a document outlining strategies like:
1) Economic prep through commited lines of credit to cover possible outcomes.
2) Outline Headroom (Available cash + Undrawn Credit Facilities)

Question 4

Internal methods to create liquidity?

Answer 4

1) Increase credit, reduce debtors.
2) Reduce stock/WIPs
3) Sell unused NCA

Question 5

What is a credit rating?

Answer 5

A credit rating’s opinion of a company’s security (co itself or bonds)

Question 6

Bonds Vs Loans, whats the difference?

Answer 6

1) Bonds (issuer/borrower) are debt instruments that come from Capital Markets (stock exchanges) and are sourced from a large pool of investors(lenders).
2) Loans come from the financial system and its a 1 borrow, 1 lender.

Question 7

How do credit ratings apply to bonds?

Answer 7

1) Investment grade (AAA) bond means low coupon rate but low risk of default.
2) Non-investment grade/ junk have high coupn rates and high risk of default.

Question 8

What are bond specific issues and their limitations?

Answer 8

Bond issues:
1) Covenants: Limits & stipulations
2) Impact on capital
3) Liquidity
Limits:
1) Lack of transparency.
2) Conflict of interest.