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?

Positive/neutral/negative effectiveness Signup and view all the answers

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

Neutral or negative Signup and view all the answers

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

Cash flow generation in relation to cash obligations Signup and view all the answers

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

Aggressive (5) Signup and view all the answers

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

Funds from operations to debt and debt to EBITDA Signup and view all the answers

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

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

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

5 standard ratios Signup and view all the answers

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

€9.25 million Signup and view all the answers

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

€92.5 million Signup and view all the answers

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

0.925% Signup and view all the answers

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

It is higher than €52 million. Signup and view all the answers

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

Both indices Signup and view all the answers

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

€700 billion Signup and view all the answers

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

It is low compared to market standards. 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?

It has more fluctuations than the investment grade index. Signup and view all the answers

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

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

When does S&P apply the comparable rating modifier?

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

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

A diversified company with at least 3 distinct business sectors 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?

At least 10% of EBITDA or FOCF must come from the smallest segment 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?

3 business lines Signup and view all the answers

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

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

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

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

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

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

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

Country risk and industry risk Signup and view all the answers

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

Management experience Signup and view all the answers

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

Entities best positioned to mitigate industry risks Signup and view all the answers

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

Rule of law risk Signup and view all the answers

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

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

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

CICRA and competitive position assessment Signup and view all the answers

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

The country in which it operates Signup and view all the answers

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

Payment culture 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.