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Lecture 11_CREDIT - Lecture11 CreditAnalysis L11XiaodingLiu...

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Lecture 11 Credit Analysis L11 Xiaoding Liu 1 FIN4243 Fall 2009
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Credit Risk Three types Credit spread risk Downgrade risk Default risk L11 Xiaoding Liu 2 FIN4243 Fall 2009
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Credit Rating Rating agencies rate specific debt issues  of corporations Consider both quantitative and qualitative  factors Ratings are forward looking L11 Xiaoding Liu 3 FIN4243 Fall 2009
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Credit Rating Some of the firms-specific factors  considered Past repayment history Quality of management, ability to adapt to  changing conditions The industry outlook and firm strategy Overall debt level of the firm Operating cash flow, ability to service debt Other sources of liquidity (cash, salable  assets) L11 Xiaoding Liu 4 FIN4243 Fall 2009
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Credit Rating Some of the firms-specific factors  considered Competitive position, regulatory environment,  union contracts/history Financial management and controls Susceptibility to event risk and political risk L11 Xiaoding Liu 5 FIN4243 Fall 2009
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Credit Rating Some factors specific to a particular debt  issue are Priority of the claim being rated Value/quality of any collateral pledged to  secure the debt The covenants of the debt issue Any guarantees or obligations for parent  company support L11 Xiaoding Liu 6 FIN4243 Fall 2009
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