Module 4 Flashcards
what is credit analysis
the process of evaluating the ability and willingness of a borrower (corporation, government, or individual) to meet their financial obligations, typically in the form of loans or bonds
what does credit analysis involve
detailed assessment of the credit risk associated with lending money or extending credit to a borrower
what is the primary purpose of credit analysis
to determine the likelihood a borrower will repay their debt on time and in full
what is credit risk
risk that a borrower will fail to meet their financial obligation as they come due, leading to a loss for the lender or investors
who are demanders of credit
- banks
- bond investors
- corporates
- individuals
why do bond investors demand credit rating
- they’re investing their money for a long time (fixed income)
- or they might not be that knowledgeable in investments but they have money
who are corporate demanders of credit analysis
- suppliers
- customers
what are suppliers looking for in credit analysis
- how reliable and stable a company is
- they want to make sure the company wont go bankrupt soon since its expensive to find new suppliers
what are customers looking for in credit analysis
determine the credit score of companies
who are suppliers of credit analysis
- banks’ in-house credit analysis teams
- internal corporate credit teams
- credit rating agencies
- fixed income research firms
- consulting firms
what are the 3 major credit rating agencies in north america
- S&P
- moody’s
- fitch
why would companies demand credit for their operating activities
- they have cyclical operating cash needs
- manufacturers need cash for materials or labour (they need it to produce the products/services before they sell it, and need money)
- advanced seasonal purchases (buying a bunch of inventory before the holiday season, and need a lot of cash to purchase)
what is the risk level for cyclical operating cash needs and why
- low risk
- because its a recurring need
why is credit needed for operating activities not always “low risk”
- cash needed to cover operating losses that might not be temporary (consistently use the cash to cover operating losses) is risky
- unless the company is able to quickly to get profit
what could a willing lender do for operating activities
make the difference between bankruptcy and continued operations for a company
how much credit is needed for investing activities
large amounts
what investing activities is credit needed for
- new PP&E (CAPEX)
- intangible assets
- mergers & acquisitions
- Leverage buy out (LBO)
what is an LBO
- leverage buy out
- type of acquisition that uses high amount of leverage to do
- the entire company is usually bought then made private
what is LBO also considered
- managers buy out (MBO)
- where managers do it so they can own the company (high incentive to do it)
- they can significantly increase their return with leverage
what financing activities is credit needed for
- getting bank loans
- getting more debt to pay off maturing debt
- funds to repurchase stock
what is trade (supplier) credit like
- routine
- non-interest bearing
- have credit terms
what does the credit terms suppliers give specify
- amount and timing of any early payment discounts
- maximum credit limit
- payment terms
- other restrictions or specifications
what does 2/10 net 30 mean
2% discount if paid within 10 days, otherwise have 30 days to pay
how do banks structure financing
to meet client needs