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This is the third edition of our Credit Primer introduction
to credit analysis. The Primer has evolved over the years;
we began by providing an overview on fundamental credit
analysis, and then presented specific tools used to
approach different industry sectors and structured
products. Our most recent version includes discussions on
the evolving world of credit products, as well as updating
material discussed in previous editions. Our aim is to give
investors better tools to detect vulnerabilities in credit
profiles, assess relative value within and across industries
and sectors, and provide an overview of absolute return
strategies.
Kick the tires: analyzing financial risk
Our discussion of financial analysis highlights how
reported results can sometimes be subject to misleading
presentation or, worse, accounting improprieties. We
focus on cash flows and cash availability and point out
shortcomings of more traditional credit metrics. We help
investors identify and quantify existing and potential cash
obligations, including those not listed on the balance sheet.
Only as strong as the foundation
Often, companies with strong operations fail to achieve a
strong credit profile because of an unsound capital
structure. Such companies are vulnerable during
downturns. We show how to evaluate capital structures to
determine long-term sustainability, and how to use this
analysis to determine downside potential in an investment
opportunity.
Assess intangibles: analyzing non-financial risk
Non-financial analysis covers the intangibles associated
with business risk – the non-financial factors behind
weakening credit profiles. Common reasons include poor
management, changes to competitive position within an
industry and industry cyclicality. We look at recent
examples of situations in which non-financial risk led to
deterioration in credit quality, and show models to assist
investors in assessing such risk.
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