131
CHAPTER 5
FUNDAMENTALS OF
CREDIT ANALYSIS
SOLUTIONS
creditworthiness may deteriorate or migrate lower. e result is that investors view the risk
of default to be higher, causing the spread on the issuer’s bonds to widen.
may be di erent from the price indicated in the market. Market liquidity risk is increased
have higher market liquidity risk.
only have a general claim on the issuer’s assets and cash ow and have a lower priority
claim than secured debt holders. Secured debt holders have a direct claim on certain assets
and their associated cash ows.
claims. First mortgage debt also has the highest expected recovery rate. First mortgage
debt refers to the pledge of speci c property. Neither senior unsecured nor junior subor-
dinate debt has any claims on speci c assets.
not in uence priority of claims. Any de ciency between pledged assets and the claims
against them becomes senior unsecured debt and still adheres to the guidelines of priority
of claims.
debt- nanced acquisitions.
can be sold and more easily converted into cash.
collateral of the company; that is, the quality and value of the assets that support the debt
levels of the company.
132 Part II: Solutions
capacity of the company.
risk, and in a highly cyclical industry, which results in more volatile earnings.
preciation and amortization = €894 + 249 million = €1,143 million. EBITDA interest
coverage = EBITDA/Interest expense = 1,143/113 = 10.12 times.
equity = €1,613 + 4,616 = €6,229 million. e Debt/Capital ratio = 1,613/6,229 =
25.90%.
cash is available to service debt compared to the previous year. Additionally, the debt/cap-
ital ratio has improved. It would imply that the ability of Pay Handle Ltd to service their
debt has improved.
superior to that of the industry.
coverage than Associated British Foods plc, which implies greater credit risk.
spreads even further.