Investment Grade vs High Yield Analysis
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Questions and Answers

Which subfactor is not assessed when determining the management and governance modifier?

  • Transparency and reporting
  • Financial performance (correct)
  • Ownership structure
  • Board structure
  • What is the final M&G modifier assessed on?

  • Three-point scale
  • Four-point scale (correct)
  • Ten-point scale
  • Five-point scale
  • Which aspect does not influence the final M&G modifier in S&P’s analysis?

  • Risk management
  • Board effectiveness
  • Internal controls
  • Corporate social responsibility (correct)
  • What does the M&G modifier assess regarding risk management?

    <p>Positive/neutral/negative effectiveness</p> Signup and view all the answers

    Which of the following best describes the ownership structure's impact on the M&G modifier?

    <p>Neutral or negative</p> Signup and view all the answers

    What primary focus do the credit ratios have in assessing a company's financial risk?

    <p>Cash flow generation in relation to cash obligations</p> Signup and view all the answers

    Which of the following represents the highest level of cash flow/leverage risk?

    <p>Aggressive (5)</p> Signup and view all the answers

    Which two core credit ratios does S&P primarily calculate for companies?

    <p>Funds from operations to debt and debt to EBITDA</p> Signup and view all the answers

    What is the role of supplemental ratios in S&P's cash flow/leverage analysis?

    <p>They help to confirm or adjust the preliminary cash flow/leverage assessment.</p> Signup and view all the answers

    How many standard supplemental ratios are typically considered in the criteria?

    <p>5 standard ratios</p> Signup and view all the answers

    What is the annual interest cost associated with the investment grade option for a duration of 10 years?

    <p>€9.25 million</p> Signup and view all the answers

    What is the total interest cost over 10 years for the investment grade option?

    <p>€92.5 million</p> Signup and view all the answers

    What is the annual interest rate for the investment grade option over 10 years?

    <p>0.925%</p> Signup and view all the answers

    How does the annual interest cost of the high yield option compare to the investment grade option?

    <p>It is higher than €52 million.</p> Signup and view all the answers

    Which index showed a volume increase from December 2020 to August 2023?

    <p>Both indices</p> Signup and view all the answers

    What was the approximate highest volume shown in the investment grade index graph?

    <p>€700 billion</p> Signup and view all the answers

    What does a 0.925% interest rate indicate about the cost of borrowing for the investment grade option?

    <p>It is low compared to market standards.</p> Signup and view all the answers

    What pattern can be observed in the high yield index's volume compared to the investment grade index from the given data?

    <p>It has more fluctuations than the investment grade index.</p> Signup and view all the answers

    What aspects does S&P assess regarding management's competence?

    <p>Strategic competence, organizational effectiveness, risk management, and robustness of governance</p> Signup and view all the answers

    When does S&P apply the comparable rating modifier?

    <p>When additional credit strengths or weaknesses may not be fully reflected in the criteria</p> Signup and view all the answers

    What is the definition of a conglomerate according to S&P?

    <p>A diversified company with at least 3 distinct business sectors</p> Signup and view all the answers

    What is one criterion regarding the earnings contribution of business lines for a company to qualify as a conglomerate?

    <p>At least 10% of EBITDA or FOCF must come from the smallest segment</p> Signup and view all the answers

    What minimum number of business lines is required for a company to be classified as a conglomerate by S&P?

    <p>3 business lines</p> Signup and view all the answers

    How does S&P assess the diversification of a conglomerate?

    <p>Through multiple earnings streams that are evaluated within a firm's business risk profile</p> Signup and view all the answers

    What is required for a segment's contribution in terms of EBITDA or FOCF for a conglomerate classification?

    <p>Contribute at least 10% from the smallest line and no more than 50% from the largest</p> Signup and view all the answers

    What is S&P's evaluation regarding management's commitment to diversified portfolios?

    <p>Management's long-term commitment is required for a favorable rating</p> Signup and view all the answers

    What does the Corporate Industry and Country Risk Assessment (CICRA) combine?

    <p>Country risk and industry risk</p> Signup and view all the answers

    Which of the following factors is NOT considered when assessing a company's business risk profile?

    <p>Management experience</p> Signup and view all the answers

    What does the company’s competitive position assessment aim to identify?

    <p>Entities best positioned to mitigate industry risks</p> Signup and view all the answers

    Which aspect is addressed by country risk in the assessment framework?

    <p>Rule of law risk</p> Signup and view all the answers

    What role do coverage ratios, such as EBITDA/Interest, play in financial assessments?

    <p>Evaluating a company's ability to service its obligations</p> Signup and view all the answers

    Which of the following is part of the Business Risk Profile (BRP) assessment?

    <p>CICRA and competitive position assessment</p> Signup and view all the answers

    Which factor can influence a company's perceived tolerance for financial risk?

    <p>The country in which it operates</p> Signup and view all the answers

    Which of the following does NOT fall under industry risk assessment?

    <p>Payment culture</p> Signup and view all the answers

    Study Notes

    Investment Grade Volume

    • Investment grade volume has been increasing over the last year, while high yield volume has been decreasing.
    • Investment grade volume was ~600 in February of 2023
    • High yield volume was ~45 in February of 2023

    Optimizing Cost of Capital

    • Focus on key factors including growth track record, dividend policy, and perceived tolerance for financial risk.
    • Management experience and growth strategy should be considered
    • Coverage ratios (e.g., EBITDA / Interest), historical figures, and forecasts should be reviewed
    • Other factors to consider include ESG, Country Risk, and Liquidity position

    Rating Framework applied by S&P

    • S&P Global Ratings utilizes a comprehensive framework to determine credit ratings
    • The framework assesses a company's Business Risk Profile (BRP) based on country risk, industry risk, and competitive position.
    • Country risk evaluates economic risks, institutional effectiveness, financial system stability, and payment culture risks.
    • Industry risk assesses the health and stability of the company's operating markets.
    • Competitive position evaluates a company's ability to capitalize on industry drivers and mitigate risks.
    • The company's Corporate Industry and Country Risk Assessment (CICRA) is derived from the combination of country risk and industry risk.
    • The CICRA, combined with the company's competitive position, forms its BRP.

    Determining the CICRA and BRP (1/2)

    • S&P assesses a company’s cash flow generation pattern in relation to obligations to determine financial risk.
    • The cash flow/leverage assessment is categorized into six levels: Minimal (1), Modest (2), Intermediate (3), Significant (4), Aggressive (5), and Highly Leveraged (6).
    • S&P calculates core credit ratios, Funds from Operations (FFO) to Debt and Debt to EBITDA, to determine a company’s preliminary cash flow/leverage assessment.
    • Supplemental ratios, like CFO to Debt, FOCF to Debt, DCF to Debt, FFO + Interest Paid to Cash Interest Paid, and EBITDA to Interest, further refine the analysis.

    Determining the CICRA and BRP (2/2)

    • Management and governance are assessed based on various subfactors, including owner structure, board structure/effectiveness, risk management, transparency, and management competence.
    • These assessments are combined into a preliminary management and governance (M&G) modifier, which can be adjusted to arrive at the final M&G modifier.
    • The final M&G modifier is assessed on a four-point scale: Positive, Neutral, Moderately Negative, and Negative.
    • The final rating impact of the M&G modifier is determined by the specific criteria used in the analysis.

    Diversification / Portfolio Effect Modifier

    • Degree of diversification is considered when assessing a conglomerate with multiple earnings streams.
    • S&P assesses conglomerates with at least 3 distinct business lines, each contributing at least 10% of EBITDA or FOCF, with the largest line contributing no more than 50% of EBITDA or FOCF.
    • The degree of diversification is categorized based on the number of business lines and the contribution each line makes to EBITDA or FOCF.

    Management and Governance Modifier

    • The Management and Governance (M&G) modifier is assessed separately for each company.
    • Five distinct subfactors are considered: Ownership Structure, Board Structure, Risk Management, Transparency, and Management.
    • Each subfactor is assessed as either positive, neutral, or negative.
    • The assessment for each subfactor is combined to provide a preliminary M&G modifier
    • The preliminary M&G modifier is then adjusted holistically to arrive at the final M&G modifier, which is categorized as one of the following: Positive, Neutral, Moderately Negative, or Negative.

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    Description

    This quiz explores the trends in investment-grade and high-yield volumes, with a focus on understanding cost of capital optimization and S&P's rating framework. Participants will analyze key factors affecting credit ratings and explore the implications of these trends in financial management.

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