Credit Analysis and

Distress Prediction
November 24, 2018

Putu Hendra Yudhana, CFA

S
Why Invests in Credits?
 Credit Analysis

S Credit is a wide-ranging area and detailed thought and

analysis is required to make sure each investment
opportunity stacks up.
 Credit Analysis

S Credit analysis include both qualitative and quantitative factors

encompassing the business and financial risks of fixed-income
issuers and individual debt issues.
S Key rating factors:
S Sector risk profile
S Country risk
S Management strategy/governance
S Group structure
S Business profile
S Financial profile
S Cash flows and profitability
S Financial structure
S Financial flexibility
 Rating Definitions

S AAA : Highest credit quality. S C: Near default.

S AA: Very high credit quality. S RD: Restricted default.

S A: High credit quality. S D: Default.

S BBB: Good credit quality.

S BB: Speculative.

S B: Highly speculative.

S CCC: Substantial credit risk.

S CC: Very high levels of credit risk.

Financial Institutions Ratings

Source: Fitch Ratings

 Sector Navigators: Generic

S Business Profile
S Sector Competitive Intensity: Industry Structure, Barriers to
Entry/Exit, Relative Power in Value Chain.
S Sector Trend: LT Growth Potential, Volatility of Demand, Threat
of Substitutes.
S Market Position and Diversification: Market Share, Competitive
Advantage, Operating Efficiency, Geographic Diversification.

S Financial Profile
S Profitability: FFO Margin, EBIT Margin, FCF Margin, Volatility,
of Profitability.
S Financial Structure and Flexibility: Lease Adjusted FFO
Leverage, Net Debt/(CFO-Capex), Liquidity, FFO Fixed Charge
Cover.
Sector Navigators: Generic Sample

S Industry Structure
S aa Oligopolic industry
S a Reduced number of competitors with clear leader
S bbb Large number of competitors with some track record price
discipline in downturns.
S bb Highly competitive industry with multiple players of
comparable size
S b Track record of aggressive and opportunistic competitive
behavior
S ccc Fragmented industry, participant landscape in aggressively
disruptive phase with multiple company failures anticipated.
Sector Navigators: Generic Sample

S Liquidity
S aa Very comfortable liquidity, no need to use external
funding in the next 24 months. Well spread debt maturity.
S a Very comfortable liquidity. Well spread debt maturity
schedule. Diversified sources of funding.
S bbb One year liquidity ratio above 1.25x. Well spread maturity
schedule of debt but funding may be less diversified.
S bb Liquidity ratio around 1.0x. Less smooth debt maturity or
concentrated funding.
S b Liquidity ratio below 1x. Overly reliant on funding source.
S ccc No near-term prospect of recovery in liquidity score above
1.0x. All/most funding sources subject to material execution
risk.
Mapping for National Ratings

Source: Fitch Ratings

Sample Credit Report

Source: Pefindo
 Sample Credit Report

Source: Fitch Ratings

 Investors’ Considerations

S Credit trends vs. valuations.

S Short Term vs. Long Term Investments.

S Investment restrictions.
S Regulations
S Client directions
S Internal policies

S Liquidity.

S Investors’ profile.
Credit Ratings and Bond Pricing:
Ratings vs. Investors’ Expectations

Source: IBPA
 Distressed Issuers

S Ratings in the lowest category (CCC, CC, C) face extremely high

default risk.
S B ratings : material default risk is present, but a limited margin of
safety remains. Capacity for continued payment is vulnerable to
deterioration in business and economic environment.
S What is really behind the B ratings? Constraints may be due to
limited scale, lack of diversification, despite consistently positive
FCF through the cycle.
S Consider country-ceilings.
Distressed Issuers

Source: Fitch Ratings

Source: Fitch Ratings
 Sign of Distress

S Debt declines in value (relative to the market).

S Company draws down all its credit or standby credit lines from its
bankers.

S Company violates its lending agreements with its bankers,

prompting banks to pull lending lines or even declare a default.

S Late or early timing of financial reporting.

S Company hires consultants specializing in bankruptcy.

S Credit ratings withdrawals.

Case: PT Express Trasindo Utama

S Defaulted coupon payment in March 2018.

S Pefindo downgraded issuer rating from idBB- to SD.

S Total assets declined 6.27% YoY in 3Q17.

S Recorded net loss of IDR210.6 billion in 9M17.

S Debt to Equity increased to 1.89x (3Q17) from 1.35x (4Q17).

S Increased competition from ride-sharing companies.

Global Defaults: 2017 Trends
Global Defaults : 2017 Trends
Global Defaults: 2017 Trends
Global Defaults: 2017 Trends
Thank You