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3. Assessing Credit Risk

c. describe the role of financial statement analysis in assessing the credit quality of a potential debt investment;

What is credit risk? Credit risk is risk due to uncertainty about a counterparty’s ability to meet its obligation.

What are the four factors that Moody’s ratings focuses on when doing credit risk analysis? 1. Company profile - scale and diversification 2. Financial policies - tolerance for leverage 3. Operational efficiency 4. Margin stability

What is considered the most fundamental measure of credit stature? What are some solvency ratios used for that purpose? Cash flow available to service indebtedness is considered the most fundamental measure of credit stature. - Retained Cash Flow (RCF)/ Total Debt (TD) - (RCF - CapEx) / TD - TD / EBITDA - (EBITDA - CapEx) / Interest - *CapEx: Capital expenditure - EBITDA / Interest