Demand for credit analysis
• The likelihood of financial distress is an important aspect of firm risk.
• Numerous parties are interested in the creditworthiness of a company, including banks, investors, suppliers, auditors, and employees, among others.
• Debt is an important source of financing, though there are trade‐offs in financing with debt instead of equity capital.
Market for credit: Suppliers
• Commercial banks
– Universal banking
• Other financial institutions
– Insurance companies, finance houses, government agencies, and leasing firms
• Suppliers
– Typically extend very short‐term financing to buyers upon delivery of goods and services
3
Market for credit: Suppliers
• Public debts market
– Firms have the size, financial strength, and credibility to bypass the banking sector
• Debt Rating
– Debt rating agencies
• Moody’s (www.moodys.com)
• Standard and Poors (www.standardandpoors.com)
• Fitch (www.fitchratings.com)
– Banks – in house ratings
Market for credit: Suppliers
• Public debts market
– Firms have the size, financial strength, and credibility to bypass the banking sector
• Debt Rating
– Debt rating agencies
• Moody’s (www.moodys.com)
• Standard and Poors (www.standardandpoors.com)
• Fitch (www.fitchratings.com)
– Banks – in house ratings
Debt ratings ‐ Drivers
• Factors that drive debt ratings:
– Performance measures are used to gauge the expected future health of the firm and the ability to repay debt.
• Firm size; interest coverage; profitability; cash flow performance; leverage
– Riskiness of profit stream
– Market share
– Industry position
– ....
Chapter 10: Credit Analysis and
Distress Prediction
Palepu & Healy
The Credit Analysis ‐Private Debt Markets
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.
2. Consider the type of loan and available security. – Numerous