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CFA® Level I · Fixed Income · free lesson
Credit Analysis for Corporate Issuers
Corporate credit analysis asks whether a company will generate enough cash to pay its debts, and how much creditors will recover if it does not. This module covers the qualitative assessment of business and management, the profitability, coverage and leverage ratios analysts compute, how to compare issuers across sectors and through the cycle, and how seniority, notching and structural subordination determine who gets paid first when things go wrong.
What you will learn
1. Describe the qualitative factors in corporate credit analysis, including business model, industry structure, competitive position, management, governance and accounting quality.
- Assess the business model, revenue predictability and reinvestment needs.
- Cyclical industries can support less debt than stable ones for the same rating.
- Competitive position: scale, cost leadership, diversification and market share.
- Management's financial policy (acquisitions, buybacks) and governance affect creditors directly.
- Accounting red flags include earnings far above operating cash flow and recurring one-off adjustments.
2. Calculate and interpret the profitability, coverage and leverage ratios used in corporate credit analysis.
- Profitability: EBITDA and EBIT margins.
- Coverage: EBITDA/interest and EBIT/interest; higher is better.
- Leverage: debt/EBITDA, debt/capital (lower is better); FFO/debt, RCF/net debt (higher is better).
- Adjust debt for leases and pensions and compute ratios consistently across issuers.
- Use forecasts and trends; beware generous EBITDA adjustments.
3. Evaluate the relative creditworthiness of corporate issuers by combining financial ratios with industry, cyclicality and other qualitative considerations.
- Compare ratios on a consistent basis with peers, history and agency benchmarks.
- Leverage and cash-flow-to-debt measures usually carry the most weight.
- Stress-test cyclical issuers: peak-cycle ratios overstate strength.
- Liquidity, maturity profile and financial policy can override headline ratios.
- The goal is relative value: compare credit quality with the spread offered.
4. Describe the seniority ranking of corporate debt, explain notching and structural subordination, and explain why the priority of claims may not be followed in bankruptcy.
- Priority: secured (first lien, second lien) > senior unsecured > subordinated > equity.
- Absolute priority rule: each class is paid in full before the next receives anything.
- Negotiated reorganizations often violate absolute priority to save time and cost.
- Notching adjusts issue ratings for seniority; it is wider for high-yield issuers.
- Holding-company debt is structurally subordinated to operating-subsidiary debt.
Module at a glance
- Qualitative analysis (business model, industry, competitive position, management, governance, accounting quality) drives the forecasts behind the ratios.
- Profitability: EBITDA and EBIT margins; coverage: EBITDA or EBIT / interest.
- Leverage: debt/EBITDA and debt/capital (lower is better); FFO/debt and RCF/net debt (higher is better).
- Compare issuers consistently, stress-test cyclical companies and check liquidity and maturities.
- Priority of claims: secured > senior unsecured > subordinated > equity; absolute priority is often violated in negotiated plans.
- Notching reflects recovery differences and is wider for high-yield issuers.
- Holding-company debt is structurally subordinated to operating-subsidiary debt.
This free module has 4 lessons, 13 practice questions with full explanations.