Credit Risk Analysis

Credit Risk Analysis - Credit Risk Analysis Market for...

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Credit Risk Analysis
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Market for Credit Composed of Demand for credit By most companies for operating, investing, and financing activities Supply of credit Offered by Creditors, banks, public debt investors, private lenders Maximum return to a debt investor is determined by the interest rate set in the loan and the prevailing market rate of interest.
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Credit Demand for Operating Activities Credit terms Dictated by past experience with a company Routine, low risk needs created by Cyclical operating cash needs such as materials or labor Advance seasonal purchases Higher risk credit When used to cover operating losses A willing creditor could make the difference between bankruptcy and continued operations for a company.
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Investing Activities Require large amounts of cash for investments such as new equipment or mergers Needs can vary in timing and amount Long-term debt routinely used for start-up and growth, but can be risky Predictable capital expenditure patterns often held by mature firms, so debt is less risky
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Financing Activities Requires credit less frequently than operating and investing activities Common situations A bank loan or bond comes due and a company does not have the necessary funds on hand Funds to pay dividends or repurchase stock are borrowed “Evergreen debt” When a company consistently pays off debt by taking on more debt
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Supply of Credit There are many sources of credit to meet companies’ demand which include: Trade Credit Bank Loans Non-Bank Financing Lease Financing Publicly-Traded Debt
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Trade Credit Routine credit from suppliers Most often non-interest bearing Suppliers often tailor contractual terms to particular customer’s existing and ongoing creditworthiness Credit limit assigned
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Bank Loans Structured to meet specific client needs Revolving credit line (similar to a credit card) Available on demand
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Credit Risk Analysis - Credit Risk Analysis Market for...

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