Fundamentals of corporate credit analysis

[...]... use the first and most restrictive of these definitions of default FUNDAMENTALS OF CORPORATE CREDIT ANALYSIS This page intentionally left blank P A R T I Corporate Credit Risk Part I addresses all the factors that influence and determine the operating and financial performance of a corporation, and thus ultimately its credit strength The development of corporate credit quality begins with the macroeconomic... in credit analysis This comprehensive work by two senior executives in Standard & Poor’s Ratings unit provides a detailed and comprehensive review of the key aspects of credit analysis Edward Z Emmer Executive Managing Director, Standard & Poor’s P R E F A C E Credit analysis is not rocket science, yet it can be a mystery to many people In many respects, we consider ourselves teachers of credit analysis. .. practitioners of credit analysis to capture all the credit risks discussed in this book in an organized framework, resulting in scores reflecting a firm’s default probability and the recovery expectations for a particular debt instrument Chapter 11, “Measuring Credit Risk: Pricing and Credit Risk Management,” discusses the use of credit scoring as a benchmark for the pricing of debt instruments Also, the use of. .. R E W O R D Since the end of the dot.com and telecom bubbles, investors in both the equity and fixed income markets have been talking about the need to get back to the basics The timely publishing of Fundamentals of Corporate Credit Analysis meets this need We are emerging from one of the most challenging credit cycles in recent memory While the equity markets received most of the media attention for... instruments Also, the use of credit scoring and ratings is presented in the context of Basel II Accords on bank capital allocation We conclude this chapter by providing a brief description of credit rating agencies and their studies of default risk and credit migration over time We conclude by presenting ratings and certain credit models Part IV, “Appendices A to G: Cases in Credit Analysis, ” presents seven... limit a company’s credit quality Chapter 3, “Company-Specific Business Risks,” a central chapter in the book, offers an approach to assessing the degree of competitiveness of a particular firm We discuss competitive position and competitor analysis; market position, sales growth, and pricing; and regulations However, for the purpose of credit analysis, we also show that diversity of cash flow sources... hedge credit risk, it is important that we not lose sight of the fundamentals During the course of the past several years the bond markets have exhibited a high degree of volatility and record default levels In order to cope with these trends and to enable portfolio managers to monitor the credit quality of their portfolios, several new techniques and instruments have proliferated Among them are credit. .. timely manner More recently, the focus of corporate credit analysis has been expanded to include the assessment of recovery prospects for specific financial obligations, should the firm become insolvent Most lending institutions are involved in credit analysis, whether they are banks, insurance companies, pension funds, or even mutual funds (the last three are often referred to as institutional investors)... Competitive analysis and competitor analysis is the key first step Competition occurs in all aspects of business, but we stress recognition of the underlying factors that drive the competition and determine which 1 Copyright © 2005 by The McGraw-Hill Companies, Inc Click here for terms of use 2 PART I Corporate Credit Risk organizations succeed and which fail We discuss the importance and the limitations of. .. the probing questions, who leave no stoned unturned The reader of this book should generally be a student of financial analysis, if not specifically credit analysis That student could be pursuing an undergraduate business degree, a more advanced degree in finance, accounting, or economics, or even professional designations such as that of Chartered Financial Analyst (CFA) One could also be a new employee .