Who is the issuer of a bond
evaluate the credit quality of a corporate bond issuer and a bond of that issuer, given key...
the cell OS is evaluate the credit
quality of a corporate bond issuer and a
bond of that issuer given key financial
ratios of the issuer and the industry
traditional credit analysis corporate
debt securities credit measures are used
to calculate an issuers credit
worthiness as well as to compare its
credit quality with pure companies and
the industry key credit ratios focus on
leverage and interest coverage and use
such measures as EBIT da free cash flow
funds from operations interest expense
and balance sheet debt an issuers
ability to access liquidity is also an
important consideration in credit
analysis ok so recall this el OS is
evaluate the credit quality of a
corporate bond issuer and a bond of that
issue are given key financial ratios of
the issuer in the industry so we're just
going to do two practice questions we
can see here that we've got an issue or
Company A and we've got the industry
medium and we've got one two three four
five columns which is giving us some key
financial ratios the first one is the
total debt to total capital next one is
free funds from operations divided by
total debt return on capital and total
debt divided by EBIT da and EBIT
interest coverage ratio so based on the
information in the exhibit companies a
x' credit risk is most likely a lower
than the industry be higher than the
industry or c same as the industry so if
we look at the total debt divided by
total capital company a forty seven
point one percent versus the industry
forty two point for free funds from
operations divided by total debt seventy
seven point five percent versus industry
twenty three point six return on capital
company a nineteen point six percent
industry median six point five five
percent total debt divided by EBIT da
for a company a one point two industry
median two point eight five and finally
EBIT de interest coverage x for company
a seventeen point seven times industry
median six point
five so a is correct based on four of
the five credit ratios Company A's
credit quality is superior to that of
the industry so its credit risk is lower
than the industry so a is correct so you
just got to be careful when you're
reading the question that it's you know
it's not talking about the credit risk
or it's talking about the credit quality
most likely least likely so if we go
through it here the total debt to total
capital a little bit more total debt on
Company A so not on that one but the
free funds from operations to total debt
better than the industry return on
capital better than the industry total
debt over a bit duh you want to look in
terms of times you've got total debt in
the numerator you want a lower number so
you're better than the industry and here
EBIT interest coverage you want a higher
number for better coverage which is
seventeen point seven which is better
than the industry so you can see the
credit risk is lower than the industry
and the credit quality is superior to
the industry okay so now we're doing to
finish this LS with one last practice
question so it's very similar we've got
now company a Company B and the industry
median so based on the information the
exhibit the credit rating of Company B
is most likely lower than Company a
higher than Company A or the same as
Company A so I'm not going to read all
the numbers but you see we've got the
same five columns first column total
debt to total capital second column free
fronts from operations divided by total
debt third column is the return on
capital fourth column is the total debt
divided by EBIT da which is x and the
fifth column the EBIT da interest
coverage ratio again in terms of x I'm
not going to read all the numbers here
five columns x three rows 15 just take a
minute to look at it but we're doing the
same type of analysis in the previous
question and in this case we're trying
to determine the credit rating of
Company B versus Company A it's not
versus the industry in this case so in
this case for a comparing Company B
versus company
a so we see that the total debt the
total capital much higher for Company B
so we're talking about the credit rating
of Company B I would say it's most
likely probably lower based on that
first column okay
second one free funds from operations to
total debt less free funds from
operations as a percentage return on
capital is a little bit better that's
fine total debt to EBIT da is higher for
Company B so again that's more risk I
would say that the credit rating more
risk is going to be a lower credit
rating and then finally the EBIT da the
interest coverage ratio you can see here
at company a is much better than Company
B we've got a much lower
EBIT interest coverage ratio so again
the indicators are showing that the
credit rating of Company B is most
likely lower than company a so a is
correct Company B has more financial
leverage and less interest coverage than
Company A which implies the greater risk
and that's the last slide for this LLS
thank you
