The analyst team analyzes industry level data in a

Info icon This preview shows pages 25–27. Sign up to view the full content.

View Full Document Right Arrow Icon
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.
Image of page 25

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 4-26 - =: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
Image of page 26
Image of page 27
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