The solution is on page 4 46 652 632 471 425 8321

Info icon This preview shows pages 19–21. Sign up to view the full content.

View Full Document Right Arrow Icon
The solution is on page 4-46. $ 652 $ 632 471 425 8,321 8,249 193 208 330 218 --- --- 9,967 9,732 22,089 22,499 1,008 277 635 497 --- --- $33,699 $33,005 --- - $ 36 $ 552 4,351 4,287 667 577 707 683 1,358 1,256 --- --- 7,119 7,355 6,537 4,528 467 598 631 549 833 906 -- --- 15,587 13,936 677 11 17,371 53 18,112 $33,699 729 6 18,307 27 19,069 $33,005
Image of page 19

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

View Full Document Right Arrow Icon
Module 4 I Credit Risk Analysis and Interpretation 4-20 Given Default that the main purpose of credit risk analysis is to quantify potential credit losses so that decisions are made with full information. Expected credit losses are the product of two , the chance of default and the size of the loss given a default. The previous section dis- 00 how to analyze financial information to determine the chance of default. In this section, _ nsider the factors that affect the amount that could be lost if the company defaulted on its ~ons, referred to as loss given default. 'hen a company defaults on its obligations (such as failing to make payments or violating covenants), creditors seek to claim the remaining assets owed. A creditor's potential loss ~OKC> on the priority of the claim compared with all other existing claims. Laws and private _--,-~.~ts determine the order of repayment among all the creditors. Companies must repay claims first and the U.S. Bankruptcy Code specifies the priority of other claims. If a ~., .... u .. y is in default, it is likely that it has fully drawn on lines of credit. This means that it has s to raise additional cash. For low priority claims (called junior claims), a conservative ch to estimating the potential loss would be to assume that the entire amount will be lost. One way to minimize potential loss is to structure credit terms for the loan in advance. credit terms include (1) credit limits, (2) collateral, (3) repayment terms, and (4) cov- to limit the loss in the event of default. This section focuses on each of these four credit , It is important to understand the relation between the likelihood of default (as assessed analysis above) and credit terms: the higher the chance of default, the stricter the credit - a lender will impose. For example, if long-term solvency is in question, a lender might rmre repayment terms so that the loan is repaid in the short term. However, there is a trade- _me lender does not want to set credit terms so strict that the terms themselves cause the wer to default. In general, trade creditors, banks, and other lenders follow standard operat- edures that provide guidelines on credit terms. 3lJSINESS INSIGHT Quantifying 'Loss Given Default' -given-default assessments can be expressed as a percent of principal and any accrued inter- ~ hat will likely be recouped. For example, Moody's assigns a loss-given-default (LGD) rating for =ch bond issue it rates, using the following scale. (Source: Moody's Approach to Global Standard Adjust- 1$ in the Analysis of Financial Statements for Non-Financial Corporations.) Rating Loss range Rating Loss range LGD1 . LGD2 . LGD3 . LGD4 . LGD5 .
Image of page 20
Image of page 21
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern