Module 16 · Fixed Income

Credit Analysis for Corporate Issuers

EN: Four C's, leverage and coverage ratios used in credit analysis.
VN: Bốn chữ C, tỷ số đòn bẩy và bao phủ trong phân tích tín nhiệm.

1. The Four C's of Credit Analysis Concept

Capacity Ability to service debt — cash flow, profitability.
Capital Capital structure, leverage, equity cushion.
Collateral Assets pledged or available for liquidation.
Covenants Contractual protections (negative pledge, ratio tests).

2. Leverage Ratios Core

\[ \text{Debt/EBITDA} = \frac{\text{Total debt}}{EBITDA} \] \[ \text{Debt/Capital} = \frac{\text{Debt}}{\text{Debt} + \text{Equity}} \] \[ \text{FFO/Debt} = \frac{\text{Funds from operations}}{\text{Debt}} \]

Practice problem

Total debt $600M, EBITDA $200M. Compute Debt/EBITDA.

Show solution

= 600/200

= 3.0×

3. Coverage Ratios Core

\[ \text{EBITDA/Interest} = \frac{EBITDA}{\text{Interest}} \] \[ \text{EBIT/Interest} = \frac{EBIT}{\text{Interest}} \] \[ \text{FCF/Debt} = \frac{FCF}{\text{Debt}} \]

Higher coverage and lower leverage → higher credit quality.

Practice problem Practice

Practice problem

EBITDA = $200M, total debt = $500M, interest expense = $40M. Compute Debt/EBITDA and EBITDA/Interest.

Show solution

Debt/EBITDA = 500 / 200

EBITDA/Interest = 200 / 40

Debt/EBITDA = 2.5×; EBITDA/Interest = 5.0×