Title LM16 Credit Analysis for Corporate Issuers IFT Notes.pdf ✅

LM16 Credit Analysis for Corporate Issuer 2025 Level I Notes © IFT. All rights reserved 1 LM16 Credit Analysis for Corporate Issuers IFT Notes 1. Introduction ........................................................................................................................................................... 2 2. Assessing Corporate Creditworthiness ....................................................................................................... 2 3. Financial Ratios in Corporate Credit Analysis .......................................................................................... 4 4. Seniority Rankings, Recovery Rates, and Credit Ratings ..................................................................... 5 Summary ...................................................................................................................................................................... 8 Required disclaimer: IFT is a CFA Institute Prep Provider. Only CFA Institute Prep Providers are permitted to make use of CFA Institute copyrighted materials which are the building blocks of the exam. We are also required to create / use updated materials every year and this is validated by CFA Institute. Our products and services substantially cover the relevant curriculum and exam and this is validated by CFA Institute. In our advertising, any statement about the numbers of questions in our products and services relates to unique, original, proprietary questions. CFA Institute Prep Providers are forbidden from including CFA Institute official mock exam questions or any questions other than the end of reading questions within their products and services. CFA Institute does not endorse, promote, review or warrant the accuracy or quality of the product and services offered by IFT. CFA Institute®, CFA® and “Chartered Financial Analyst®” are trademarks owned by CFA Institute. © Copyright CFA Institute Version 1.0
LM16 Credit Analysis for Corporate Issuer 2025 Level I Notes © IFT. All rights reserved 2 1. Introduction This learning module covers:  The qualitative and quantitative factors used to evaluate the creditworthiness of a corporate borrower  Financial ratios used in credit analysis  Seniority rankings of debt and their impact on credit ratings 2. Assessing Corporate Creditworthiness The creditworthiness of a company primarily depends on its ability to generate profits and cash flows sufficient to meet interest and principal payments. A combination of qualitative and quantitative factors is used to evaluate a corporate’s creditworthiness. Qualitative Factors Exhibit 1 from the curriculum shows the key qualitative factors used to gauge a company’s ability to satisfy its debt obligations. Established firms with a business model characterized by stable and predictable cash flows, low business risk, and less competitive pressures have a greater capacity to use debt in their
LM16 Credit Analysis for Corporate Issuer 2025 Level I Notes © IFT. All rights reserved 3 capital structure and a lower likelihood of default. In contrast, firms with lower and less stable cash flows, higher business risk, and/or greater competition have a lower capacity to use debt in their capital structure and a higher likelihood of default. Equity vs Fixed Income analysts: While equity analysts focus on all future cash flows, fixed- income analysts focus on how a company’s creditworthiness may change over a shorter time frame given the finite nature of debt claims. Secured vs Unsecured debt: In case of unsecured debt, the company cash flows are the primary source of repayment. In cash of secured debt, specific company assets are designated as collateral and serve as a secondary source of repayment. Secured lenders prefer to have tangible (or hard) collateral rather than intangible (or soft) collateral. The use of collateral and secured debt can reduce the cost of borrowing as compared to unsecured alternatives. Corporate governance is also an important factor to consider in the analysis. Unlike shareholders who have voting rights on important company matters, debtholders seek to specify what borrower restrictions will apply and how the debt proceeds will be used at the time of issuance of debt. Analysts should also evaluate if the company uses aggressive accounting policies (e.g., use of significant off-balance sheet financing, capitalizing versus expensing items, early and premature revenue recognition). These items are considered potential warning flags. Quantitative Factors Exhibit 2 from the curriculum shows the key quantitative factors used to measure a company’s credit risk.
LM16 Credit Analysis for Corporate Issuer 2025 Level I Notes © IFT. All rights reserved 4 Top-down analysis typically begins with a macroeconomic forecast, which gauges a company's growth relative to GDP, estimates a firm's addressable market and market share, and assesses the likelihood and impact of potential adverse events. Bottom-up analysis involves forecasting key revenue drivers and balance sheet positions. A hybrid approach combines expected cyclicality with changing bottom-up features to forecast a company’s cash flows. 3. Financial Ratios in Corporate Credit Analysis Exhibit 3 from the curriculum shows the common financial ratios used to evaluate a company’s credit risk.