Brainscape - General Rating Criteria Flashcards
What are the Qualitative Factors to consider when rating a corporate?
Industry Risk Operating Environment Company Profile Management Strategy / Governance Group StructureIndustry Risk Operating Environment Company Profile Management Strategy / Governance Group Structure
What are the Quantitative Factors to consider when rating a corporate?
Cash Flow & Earnings Capital Structure Financial Flexibility Cash Flow & Earnings Capital Structure Financial Flexibility
What factors impact industry risk?
Industries that are in decline, highly competitive, capital intensive, cyclical or volatile are inherently riskier than stable industries with few competitors, high barriers to entry, national dominance, and predictable demand levels.The inherent riskiness and/or cyclicality of an industry may result in an absolute ceiling for ratings within that industry. Therefore, an issuer in such an industry is unlikely to receive the highest rating possible ( ̳AAA‘) despite having a very conservative financial profile.
What factors are considered when assessing operating environment?
Geographical Diversification Trends in Industry expansion / consolidation to remain competitive Stage of industry life cycle and maturity of product segments (indication of capex requirements) Country Risk (economic situation, legal regime, market transparency etc) Geographical Diversification Trends in Industry expansion / consolidation to remain competitive Stage of industry life cycle and maturity of product segments (indication of capex requirements) Country Risk (economic situation, legal regime, market transparency etc)
What factors are considered when assessing the company profile?
Competitive Position in core markets
Level of product dominance & ability to influence price
Product Diversity
Geographic spread of sales
diversification of major customers and suppliers
Size (not as critical in mining as cost position) Competitive Position in core markets
Level of product dominance & ability to influence price
Product Diversity
Geographic spread of sales
diversification of major customers and suppliers
Size (not as critical in mining as cost position)
What factors are considered when assessing management strategy & corporate governance?
operating track record (operating efficiency, competive position, size)
Risk tolerance (strategic fit of acquisitions, debt/equity funding mix)
financial policies
financial performance over time
corporate governanceoperating track record (operating efficiency, competive position, size)
Risk tolerance (strategic fit of acquisitions, debt/equity funding mix)
financial policies
financial performance over time
corporate governance
What factors are considered when assessing corporate governance?
boardroom independence management compensation related party transactions integrity of accounting and auditboardroom independence management compensation related party transactions integrity of accounting and audit
How does ownership and group structure impact ratings?
Fitch‘s linkage framework reflecting the multi-faceted relationships between group entities. These include legal jurisdiction, corporate structures, company by-laws, loan documentation, the degree of integration between the entities, and the strategic importance of a subsidiary.
For holding companies, itch analyses the credit quality of material operating entities and their contribution (upstreaming dividends, parental access and control of subsidiaries‘ cashflows) to the holding company or relevant rated entities.
Where a consolidated approach is not taken – because of material minority interests or other considerations – Fitch typically considers the sustainability and predictability of its income streams (including cash pooling within the group, and conditional dividends being upstreamed) used to service its debt, including the credit qualities of relevant entities and their contribution to the group‘s financial profileFitch‘s linkage framework reflecting the multi-faceted relationships between group entities. These include legal jurisdiction, corporate structures, company by-laws, loan documentation, the degree of integration between the entities, and the strategic importance of a subsidiary.
For holding companies, itch analyses the credit quality of material operating entities and their contribution (upstreaming dividends, parental access and control of subsidiaries‘ cashflows) to the holding company or relevant rated entities.
Where a consolidated approach is not taken – because of material minority interests or other considerations – Fitch typically considers the sustainability and predictability of its income streams (including cash pooling within the group, and conditional dividends being upstreamed) used to service its debt, including the credit qualities of relevant entities and their contribution to the group‘s financial profile
What adjustments are usually made to liabilities to make comparisons across companies more accurate?
Borrowings of partly owned companies or unconsolidated subsidiaries that may involve claims on the parent issuer;
Disclosed debt associated with receivables securitisations, whether there is recourse to the issuer or not (see also Debt Factoring; Analytical Adjustments for Corporate Issuers and Their Recovery Ratings );
In cases where material amounts of debt are described as non-recourse to the rated entity, Fitch typically forms a view on the economic incentives behind the non-recourse status before excluding the debt (and associated cash flows) in its calculations;
Operating lease obligations (see Operating Leases: Updated Implications for Lessees’ Credit).Borrowings of partly owned companies or unconsolidated subsidiaries that may involve claims on the parent issuer;
Disclosed debt associated with receivables securitisations, whether there is recourse to the issuer or not (see also Debt Factoring; Analytical Adjustments for Corporate Issuers and Their Recovery Ratings );
In cases where material amounts of debt are described as non-recourse to the rated entity, Fitch typically forms a view on the economic incentives behind the non-recourse status before excluding the debt (and associated cash flows) in its calculations;
Operating lease obligations (see Operating Leases: Updated Implications for Lessees’ Credit).
What factors impact the assesment of a company’s financial profile?
cash flow and earnings capital structure financial flexibility cash flow and earnings capital structure financial flexibility
Why are cash flow and earnings important considerations when assessing the financial profile of a company?
Fitch‘s analysis focuses on the stability of earnings and continuing cash flows from the issuer‘s major business lines. Sustainable operating cash flow supports the issuer‘s ability to service debt and finance its operations and capital expansion without the reliance on external funding.
Why is capital structure an important consideration when assessing the financial profile of a company?
Fitch analyses capital structure to determine an issuer‘s level of dependence on external financing. Because industries differ significantly in their need for capital and their capacity to support high debt levels, the financial leverage in an issuer‘s capital structure is considered relative to industry norms.
what factors contribute to financial flexibility?
The more conservatively capitalised an issuer, the greater its financial flexibility. In general, a commitment to maintaining debt within a certain range allows an issuer to cope better with the effect of unexpected events on the balance sheet. Other factors that contribute to financial flexibility are the ability to redeploy assets and revise plans for capital spending, strong banking relationships, and the degree of access to a range of debt and equity markets. Committed, long-dated bank lines provide additional support. A large proportion of short-term debt in the capital structure can indicate reduced financial flexibility
What factors are considered when determining to link or notch the rating of a subsidiary from its parent?
- determine if a parent/subsidiary relationship exists;
- determine whether or not the parent and/or subsidiary operates under special restrictions that would dictate the use of other existing Fitch criteria methodology;
- determine the relative standalone credit strength of the parent and its subsidiary;
- determine the strength of any parent and subsidiary relationship by assessing any legal, operational and strategic ties; and
- formulate a conclusion.1. determine if a parent/subsidiary relationship exists;
- determine whether or not the parent and/or subsidiary operates under special restrictions that would dictate the use of other existing Fitch criteria methodology;
- determine the relative standalone credit strength of the parent and its subsidiary;
- determine the strength of any parent and subsidiary relationship by assessing any legal, operational and strategic ties; and
- formulate a conclusion.
Define Debt, Net Debt, Gross Interest and Net Interest?
Debt represents total debt or gross debt, while net debt is total debt minus (freely available/unrestricted) cash and equivalents on the balance sheet. Recognising the cultural differences in the approach of analysts and investors worldwide, Fitch evaluates various debt measures on both a gross and net debt basis. Distinctions are also made between total interest and net interest expense. The following definitions include only gross interest and gross debt to illustrate the concepts. For a detailed explanation of net debt and net interest calculations, see the report Cash Flow Measures in Corporate Analysis.
