Page 44 - FINAL CFA SLIDES DECEMBER 2018 DAY 15

Session Unit 16:

55. Fundamentals of Credit Analysis

Liquidity. Liquidity or availability of cash is critical for high yield issuers. High yield issuers have

limited access to additional borrowings, and available funds tend to be more expensive for high yield
issuers. Bad company-specific news and difficult financial market conditions can quickly dry up the

liquidity of debt markets. Many high yield issuers are privately owned and cannot access public
equity markets for needed funds.

tanties

Financial projections. Projecting future
earnings and cash flows, including stress

scenarios and accounting for changes in capital
expenditures and working capital, are
important for revealing potential vulnerabilities

to the inability to meet debt payments

.

Debt structure. High yield issuers’ capital structures often include different types of debt with several
levels of seniority and hence varying levels of potential loss severity. Capital structures typically include
secured bank debt, second lien debt, senior unsecured debt, subordinated debt, and preferred stock.

Some of these, especially subordinated debt, may be convertible to common shares.