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Flashcards in this deck (36)

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  • What factors do analysts use to evaluate corporate bond default risk?


    • Qualitative factors
    • Quantitative factors
    finance analysis
  • What are some qualitative factors in bond evaluation?


    • Business model
    • Industry competition
    • Business risk
    • Corporate governance
    finance qualitative
  • What characterizes a high credit quality business model?


    • Stable cash flows
    • Predictable cash flows
    finance credit
  • How does industry competition affect credit quality?


    Less intensive competition is favorable for an issuer's credit quality.

    finance competition
  • What is business risk in credit analysis?


    Risk of unexpected deviations from expected revenues and margins.

    finance risk
  • What should high credit quality issuers ensure regarding corporate governance?


    Sufficient processes for fair treatment of debtholders.

    finance governance
  • What are typical covenants for unsecured investment-grade issuers?


    • Affirmative covenants
    • Compliance with laws
    • Maintenance of assets
    • Paying taxes
    finance covenants
  • What type of covenants do high-yield issuers usually have?


    • Negative covenants
    • Restrict dividends
    • Limit further debt issuance
    finance covenants
  • What are warning signs in accounting policies for creditworthiness?


    • Aggressive revenue recognition
    • Off-balance-sheet financing
    • Frequent auditor changes
    finance accounting
  • What does quantitative analysis involve in bond evaluation?


    Estimating future financial statements and cash flows.

    finance quantitative
  • What are the two approaches to quantitative analysis?


    • Top-down
    • Bottom-up
    finance analysis
  • What factors indicate higher credit quality in issuers?


    • Strong operating profits
    • Low leverage
    • High liquidity
    finance credit
  • What is the significance of earnings before interest and taxes (EBIT)?


    It's a key term in calculating financial ratios.

    finance ratios
  • What does EBITDA stand for?


    Earnings Before Interest, Taxes, Depreciation, and Amortization

    finance ebitda
  • How is EBITDA calculated?


    Operating income plus depreciation and amortization

    finance calculation
  • What is a drawback of using EBITDA for credit analysis?


    It does not adjust for capital expenditures and changes in working capital

    finance analysis
  • What does CFO stand for?


    Cash Flow from Operating Activities

    finance cfo
  • How is CFO calculated?


    Net income plus noncash charges minus increase in working capital

    finance calculation
  • What does FFO stand for?


    Funds From Operations

    finance ffo
  • How is FFO calculated?


    Net income from continuing operations plus depreciation, amortization, deferred taxes, and noncash items

    finance calculation
  • What does FCF stand for?


    Free Cash Flow

    finance fcf
  • How is FCF calculated?


    CFO minus fixed asset expenditures plus net interest expense

    finance calculation
  • What does RCF stand for?


    Retained Cash Flow

    finance rcf
  • How is RCF calculated?


    Operating cash flow minus dividends

    finance calculation
  • What is a bond’s seniority ranking?


    Its position in the priority of claims to the issuer’s assets and cash flows

    finance bonds
  • What is secured debt?


    Debt backed by collateral that can be sold to recover funds

    finance debt
  • What is unsecured debt?


    A general claim to the issuer’s assets and cash flows

    finance debt
  • What are the types of secured debt?


    First lien, first mortgage, senior secured, junior secured

    finance debt
  • What are the types of unsecured debt?


    Senior, junior, subordinated

    finance debt
  • What is the highest rank of unsecured debt?


    Senior unsecured

    finance debt
  • What is the general order of seniority rankings for debt repayment?


    1. First lien/mortgage
    2. Senior secured (second lien)
    3. Junior secured
    4. Senior unsecured
    5. Senior subordinated
    6. Subordinated
    7. Junior subordinated
    finance debt
  • What does pari passu mean?


    All debt within the same category has the same priority of claims

    finance terms
  • What happens to senior claims if collateral value is insufficient?


    They rank pari passu with senior unsecured claims

    finance bonds
  • What is the relationship between seniority ranking and credit risk?


    Lower seniority ranking means higher credit risk

    finance risk
  • What can happen during a bankruptcy process?


    Lower-priority debtholders may get paid even if senior debtholders are not paid in full

    finance bankruptcy
  • What are the costs associated with bankruptcies?


    They can be costly and take a long time to settle

    finance bankruptcy