RSM430H1 Lecture Notes - Lecture 10: Credit Rating Agency, High-Yield Debt, Corporate Bond
Document Summary
Investors rely primarily on rating agencies to assess credit quality of an issuer. Issuer needs 2 credit rating to access public bond market. Higher credit rating means less onerous covenants of company iii. Provide information on financial health of borrowers and their debt instruments. Issuer pays to have their company and debt rated. Ratings agencies do not provide real-time evaluation of borrowers. Can only update information when company issues quarterly earnings. Share price can provide some indication of financial health. Ratings agencies score the probability of continued and uninterrupted streams of interest and principal payments to investors. Ability to generate recurring free cash flow to repay interest and debt. Will generally look at three to five years of historical data. Look for consistent, sustainable, predictable free cash flow. Corporate/issuer credit rating and bond issue are rated separately. To be relevant over a 3 to 5 year horizon. Risk of government jumping in to nationalize country just because.
