The analysis of a specific credit issuer
With respect to the analysis of a specific issuer, it is important to consider how far the market value of the firm’s assets is away from its default threshold. When the value of the assets approaches the default barrier, fundamental issues such as the likelihood of capital structure changes, possible corporate actions and potential changes in the business model determine credit valuation. Generally, the value of credit analysis rises with an increasing level of leverage because the probability of default is primarily related to management options, such as the above-mentioned. Credit analysts typically do not only rely on balance sheet analysis, but rather introduce metrics like debt-to-EBITDA ratios in order to measure a company’s ability to service its debt from operations. Furthermore, credit analysts’ views on the probability and timing of potential capital structure changes are essential in determining valuation. If the magnitude and likelihood of a change in the capital structure is high, then it will dominate any valuation of a credit. Yet, quantitative models help to estimate the impact of capital structure changes on the valuation of a particular issuer.
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