1. Suppliers of credit
2. Identify what portion of the company’s total liability is comprised of
   • public debt
   • bank debt
   • non-bank private debt
3. How large is the company’s trade credit relative to total debt?

 

2. Maturity structure of debt
3. What portion of total debt matures in less than one year? Two years? Three years? Four years? Five years? Beyond five years?

• Based on #1 and #2 above, what does the trend indicate? Is liquidation risk lower or higher now in comparison to the years past?
• Is the company more likely or less likely to be constrained in its activities as a result of the debt maturity structure? Discuss how the incentives of short-term versus long-term creditors might affect the company’s constraints.
• Using the sales based Herfindahl index, examine whether or not the company operates in an industry characterized by fierce competition? How does the debt maturity structure affect the company’s competitive position in the industry?

 

3. [Covenants] Using the company’s most recently filed SEC filings in the business database of Lexis Universe,
   1. Identify the covenants related to the company’s debt contracts. Are these covenants affirmative or restrictive in nature?
   2. How close is the company to violating any of the covenants?
   3. What is the company’s credit rating? Do the covenants require the company to maintain a certain credit rating?

 

 

 

4. Governance structure
5. What is the size of the company’s board?
6. What percent of the board members are affiliated with the company in other ways (i.e., not independent)?
7. Using information disclosed in the most recent proxy statement, determine the percentage of company stock owned by the CEO? What are the pros and cons of greater CEO ownership for the credit risk of the company?

 

5. [Ratio analysis] Compute the ratios provided in the lecture slides
   1. Liquidity
   2. Solvency
   3. Operating profitability

 

Discuss in detail, the trend in these ratios relative to the competitor and across time.  What insights can we draw from these financial statement variables regarding the risks to the company’s creditors?  Include graphs in addition to an appendix with the ratios to illustrate your arguments.

 

6. [Probability of financial distress] Estimate the probability of financial distress using (a) Altman’s Z-score; and (b) Option pricing model. Be sure to use both the old (1968) Z-score from Altman (1968) as well as the updated (2004) Z-scores from Hillegeist, et al. (2004).
   1. How do these measures of distress probabilities compare with each other?
   2. How has the probability of distress changed over the five year period?
   3. How does it compare with that of the competitor?
7. Credit Spread Analysis Analyze the yield spread between your two corporate bonds and the overall corporate market yield spread between high yield and investment grade bonds.

 

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