evaluation of the risk of a firm defaulting on its debt. Value-at-
risk profiles are developed to assess default risk.
Do the financial statements give indications of whether a firm might default on its debt? What ratios are relevant?
Chapter 21
The Analysis of
Credit Risk
Links
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Link to Previous Chapters
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Chapter 20 showed how the
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analysis of fundamentals helps in
How are credit rating scores developed?
How are valueat risk profiles developed for business debt?
How does pro forma analysis
aid in the evaluation of credit risk,
Unfunded pension liabilities not booked
Guarantees of third-party or related-party debt
Reformulated Income Statements and Cash Flow Statements
Income Statement: Distinguish income from operations that “covers” net financial expense The reformulation follows that for profitability analysis in Chapter 9
Examples: Operating leases
Agreements and commitments:
?
third-party agreements
?
through-put agreements
?
take-or-pay agreements
?
repurchase agreements
?
sales of receivables with recourse
? Suppliers to the firm who grant (usually short-term) credit upon delivery of goods and services.
Off-Balance-Sheet Financing
Off-balance-sheet financing transactions are arrangements to finance assets and create obligations that do not appear on the balance sheet.
? Public debt market investors who include (long-term) bondholders and (short-term) commercial paper holders.
? Commercial banks make loans to firms.
? Other financial institutions such as insurance companies, finance houses and leasing firms make loans, much like banks, but usually with specific assets serving as collateral .liquidity plFra biblioteknning and
financial strategy?
Link to Web Page
The book's web site has more discussion of risk.
What you will learn from this chapter
? How default risk determines the price of credit (the cost of debt capital)
? How value-at-risk analysis is used to asses default risk
? How financial planning works
Default Risk and Default Premiums
Required Return on Debt = Risk-free Rate + Default Premium
The default premium is determined by the risk that the debtor could default
Similar terms: ? Required return on debt ? Cost of debt ? Price of credit
The Suppliers of Credit
the evaluation of equity risk.
Value-at-risk profiles were
developed to assess equity risk.
This Chapter
This chapter shows how fundamental analysis helps in the
Cash Flow Statement: Distinguish (unlevered) cash flow from operations that can be used to make payments on debt The reformulation follows that in Chapter 10
? What determines default risk
? How default risk is analyzed
? How credit scoring models work
? How pro forma analysis aids in assessing the default risk