Lecture notes S2 L 9 - 1 Credit Analysis Main References...

Info iconThis preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon
1 1 Credit Analysis Main References Subramanyam and Wild, Ch. 10 Palepu & Healy, Ch. 10 2 Key Concepts and objectives • The likelihood of financial distress is an important aspect of firm risk. • Numerous parties are interested in both the short term and long term credit- worthiness of a company, including – banks, – investors, – suppliers, – auditors, and – employees
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2 3 Key Concepts and objectives Analysts should be able to perform adequate financial analysis and form an opinion about the credit worthiness of a firm. The key objectives of conducting credit analysis are as follows: – Appreciate the importance of liquidity and working capital in credit analysis – Understand capital structure and its relevance in credit analysis – Evaluate earnings coverage and its importance in credit analysis – Evaluate the relevance of debt ratings in credit analysis – Make necessary adjustments to arrive at a reasonable liquidity and solvency position of the firm 4 The Market for Credit Commercial banks – May have better knowledge of a firm, but are constrained in the amount of risk they can assume. Non-bank financial institutions – For example, savings & loans, and investment bankers. Public debt markets – Requires that a firm have the size, financial strength, and credibility to bypass the banking sector. Sellers who provide financing – Suppliers typically extend very short term financing to buyers, but may occasionally grant a loan.
Background image of page 2
3 5 Analyzing Credit • Credit analysis is more narrowly focused than estimating the value of a firm’s equity. • Business strategy, accounting, financial, and prospective analyses are still important. – The better a firm’s future business prospects, the lower the risk to the creditor. 6 The Credit Analysis Process in Private Debt Markets The steps a commercial lender might follow are presented below. Note that they are interdependent 1. Consider the nature and purpose of the loan. This helps with structuring the terms and duration of the loan, along with the rationale for borrowing. The size of the loan must be set.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
4 7 The Credit Analysis Process in Private Debt Markets 2. Consider the type of loan and available security. Numerous types of loans are available from open lines of credit to lease financing. The type and amount of security needed to collateralize a loan must be established 3. Assemble loan structure and debt covenants. Loan covenants specify mutual expectations of the borrower and lender. Some covenant terms include the borrower maintaining specific financial conditions. 8 The Credit Analysis Process in Private Debt Markets 4. Conduct financial analysis. Comprehensive analysis of business strategy,
Background image of page 4
Image of page 5
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 20

Lecture notes S2 L 9 - 1 Credit Analysis Main References...

This preview shows document pages 1 - 5. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online