The major credit-rating agencies, Moody’s, Standard & Poor’s (S&P), and Fitch Ratings (“Fitch”), play an essential role in the credit markets. For a majority of bonds, at least two of the agencies provide ratings. Credit rating agencies use similar symbol-based…

Investors overwhelmingly believe that credit rating agencies do a good job assessing credit risk. In fact, with a few exceptions (e.g., too high ratings on US subprime mortgage-backed securities issued in the mid-2000s that turned out to be much riskier…

Traditionally, many analysts evaluated creditworthiness based on what is called the “Four Cs of credit analysis”. Capacity Capacity is the ability of a borrower to service their debt. To be determined, an industry analysis should be conducted. Afterwards the specific…

Key credit analysis measures fall into 4 different groups: Profitability and Cash Flows It is from operating cash flows that companies can service their debt payments. The operating income can be obtained by subtracting operating expenses from operating revenues, and…

To illustrate how to evaluate the credit quality of a corporation, we will look at CVS, a US-based healthcare company. You will be in the shoes of a banker that needs to assess the creditworthiness of CVS. Using the financial…

As we saw previously, the yield on a government bond (the benchmark) is: $$\text{Goverment  bond yield = Real risk-free interest rate + Expected inflation rate + Maturity premium}$$ To this benchmark yield, we need to add the yield spread, the…

Special considerations are important when evaluating the creditworthiness of debt issuers in 3 market segments: high-yield corporate bonds, sovereign bonds, and non-sovereign government bonds. High-yield (non-investment-grade or “junk”) corporate bonds are those rated below Baa3/BBB- by the major rating agencies….