Mai
Nguyen
Dawn of Finance
69
o Large off-balance-sheet liabilities.
o Industry in decline.
Higher credit risk & default risk than investment grade bonds credit analysts must pay more
attention to loss severity
In terms of the factors
that affect their return, high yield bonds may be viewed as a hybrid of
investment grade bonds and equity.
o Compared
to investment grade bonds, high yield bonds
show greater price and spread volatility
are more highly correlated with the equity market.
o High yield analysis can include some of the same techniques as equity market analysis, such
as enterprise value.
EV = equity market capitalization + total debt – excess cash
Firms with a wider difference between EV/EBITDA and debt/EBITDA ratios have
greater equity relative to their debt have less credit risk.
Special considerations for high yield bonds:
(1) Liquidity 6
sources of liquidity
o Balance sheet cash.
o Working capital.
o Operating cash flow (CFO).
o Bank credit.
o Equity issued.
o Sales of assets.
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