Investment Grade vs High Yield Analysis

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.

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.