the

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