Credit risk is the issuers’ failure of meeting their interest or principal payment obligations thereby exposing the lender to potential loss of income or capital. When the issuer defaults on interest and principal payments, the investor or lender will have to suffer a loss. Credit risk may be the most damaging of risks when it comes to fixed-income securities. If you are in search of someone good at money lending in toa payoh, you are at the right place.
Factors used to assess credit risk
Credit rating institutions assess the credit risk of bonds and other debt or money market instruments such as commercial papers, certificates of deposit, etc. This is based on a detailed analysis of their financial statements, market position, operational efficiency, and track record of the management in making debt payments. Rating agencies use several different methodologies of credit analysis for different industries. Some of the key credit risk analysis factors are as follows
This is the type of credit risk related to the size of the industry, its growth prospects, the competitive scenario and demand vs supply dynamics, vulnerability to technological change, the significance of the industry to the economy, government policies, entry barriers, cyclicality, and profitability.
pricing power, competitive advantage,Market share, customer relationships, brand equity, track record of product development, etc.
Operating efficiency is generally the analysis of a certain company’s ability to produce goods and services at a competitive cost. Technology. access to raw materials, labour, capacity utilisation, and backward or forward integration are some key factors that impact the capacity of the company.
Financial risk analysis
This is the detailed analysis of financial statements such as balance sheet, profit and loss account, as well as key ratios to understand a company’s financial capacity to meet its obligations. Some key ratios are
- debt to net worth
- Interest coverage ratio which is operating income/interest costs
- Profitability margin: Operating margin
- Current ratio: current assets/current liabilities
- Return on capital employed
Frequency of credit rating assessment
Credit ratings are usually done on a half-yearly basis. However, if the rating agencies receive material information that could change the company’s credit risk outlook then the rating may be revised irrespective of when the last credit risk assessment was done.
Before making investment decisions you should always refer to the latest factsheet to understand the exact credit risk of the company . It is advisable even to consult with your financial advisor before making any significant investment decisions.