b) Risks in relying on ratings from credit rating agencies (Los 47.e)

Mai Nguyen 
Dawn of Finance 
66 
 Eg: subprime mortgage securities were assigned much higher ratings than they 
deserved. 
Event risk is 
difficult to assess 
 Risks that are specific to a company or industry  difficult to predict and 
incorporate into credit ratings 
 Events that are difficult to anticipate (natural disasters, acquisitions, and equity 
buybacks using debt)  not easily captured in credit ratings 
Credit ratings lag 
market pricing 
 Market prices and credit spreads change much faster than credit ratings 
 Market prices reflect expected losses, while credit ratings only assess default risk 
4) 4 Cs of traditional credit analysis (Los 47.f) 
1. Capacity 
(khả năng trả nợ)
 
corporate 
borrower's ability 
to repay its debt 
obligations on 
time 
Industry structure 
 threat of entry,
 power of suppliers,
 power of buyers, 
 threat of substitution,
 rivalry among existing competitors 
Industry 
fundamentals 
 
including the 
influence of 
macroeconomic factors 
on an industry's growth 
prospects and 
profitability.
 Industry cyclicality  Cyclical industries tend to be more 
risky than noncyclical industries. 
 Industry growth prospects.
 Industry published statistics  provided by: 
 rating agencies, 
 investment banks,
 industry periodicals,
 government agencies

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