The analyst team analyzes industry level data in a

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The analyst team analyzes industry level data in a manner as previously discussed. Each rating agency tailors existing frameworks (such as Porter's five forces or a SWOT analysis) and augments their analysis with in-house quantitative (statistical) models. The agencies have indus- try experts; that is, analysts who have deep understanding of particular industries. The analyst team gathers financial statement data to compute and analyze financial ratios such as those we described earlier. A list of the ratios that S&P uses, together with median aver- ages for various risk classes, is in Exhibit 4.6. In examining the ratios, recall that debt is increas- ingly more risky as we move from the first row Aaa, to the last, C. The team also seeks firm-specific qualitative information such as the company's history, executives' reputation, number of employees, corporate governance structure, employee turn- over, and customer satisfaction. As part of this evaluation, analysts do on-site visits and speak directly with managers and executives. Importantly, the analyst team must determine whether and how historic company-specific information will change in the future. After all, credit ratings are forward-looking assessments of a company's ability to make timely debt payments. To that end, analysts project financial statements and ratios under a number of scenarios and perform sensitiv- ity analysis on their numbers.
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Module 4 I Credit Risk Analysis and Interpretation 4-26 - =:C-]3IT 4.6 Ratio Values for Different Risk Classes of Corporate Debt* Retained EBITAI EBITAI cash Average Operating EBITA Interest (FFO 4- IntExp) / Debt/ Debt/Book Flow/Net CAPEXI Assets Margin Margin Expense IntExp EBITDA Capitalization FFO/Debt Debt Depreciation 20.6% 22.8% 24.9% 25.6 23.8 0.7 20.7% 129.5% 83.2% 1.2 12.6% 20.5% 21.6% 12.5 13.6 1.6 39.3% 51.8% 39.4% 1.2 11.8% 14.9% 15.0% 7.5 8.3 1.9 43.7% 40.2% 30.7% 1.0 9.0% 12.4% 13.1% 4.4 6.1 2.7 45.4% 27.4% 26.6% 1.1 8.3% 10.9% 12.4% 3.1 4.5 3.3 50.8% 22.3% 23.5% 1.1 6.6% 7.8% 9.1% 1.4 2.6 5.1 73.8% 11.7% 11.6% 0.9 2.3% 3.1% 2.8% 0.4 1.4 7.7 100.5% 3.1% 3.2% 0.7 s 2010 median values; from Moody's Financial Metrics™, Key Ratios by rating and industry for North American nonfinancial corporations: 2010 (reproduced with permission). See Appendix for ratio definitions; approximate definitions are shown below for convenience. Ratio Definition EBITNAverage Assets EBITNlnterest Expense EBITA Margin Operating Margin (FFO + Interest Exp)/Interest Exp FFO/Debt RCF/Debt DebtlEBITDA DebtlBook Capitalization EBITAIAverage of Current and Previous Year Assets EBITNlnterest Expense EBITNNet Revenue Operating Profit/Net Revenue (Funds From Operations + Interest Expense)/Interest Expense Funds From Operations/(Short-Temn Debt + Long-Temn Debt) (FFO - Preferred Dividends - Common Dividends - Minority Dividends)/(Short-Temn Debt + Long-Term Debt) (Short-Temn Debt + Long-Term Debt)/EBITDA (Short-Temn Debt + Long-Temn Debt)/(Short-Term Debt + Long-Term Debt + Deferred Taxes + Minority Interest + Book Equity) Capital expenditures/Depreciation Expense CAPEXlDepreciation Exp where: EBITA = Earnings from continuing operations before interest, taxes, and amortization EBITDA = Earnings from continuing operations before interest and taxes, depreciation, and amortization FFO = Net income
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  • Fall '11
  • KentWang
  • Economics, Debt, ......, Home Depot Inc., credit risk analysis

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