Assessing creditworthiness of an issuer of bond, Financial Management

Following are the areas an analyst should consider while assessing the creditworthiness of an issuer.

1. Security Limitations: The bond indenture should state the sources of revenue and how they can be protected by federal, state and local laws and procedures. Sometimes though there is a structured flow of revenue it may be affected by other levels of government.
2. Funds flow Structure Analysis: As the revenue of the bond is the source of payment of the debt, flow of funds for revenue bonds become an important area of analysis.  Revenue of the enterprise is transferred to a revenue fund and disbursements for expenses are made to funds like operation and maintenance fund, sinking fund, debt service reserve fund, renewal and replacement fund, reserve maintenance fund and surplus fund.

A revenue bond can be structured in such a way that the revenue generated by an enterprise is first used to meet the general obligations of the issuer and the left over funds are used for the disbursement of expense of the above mentioned funds.

Let us see in brief the purpose of each fund and the funds flow structure. Operational needs are to be first met for the enterprise to be going. Therefore, cash needed for this purpose is first transferred into operation and maintenance fund, then the cash required for servicing the debt is transferred to sinking fund. Debt service reserve fund is to maintain a reserve so that in case of shortage of revenue in future it can be used to meet the issuer's debt obligation arising from issuing the bond. Renewal and replacement fund is to maintain cash to meet the expenses arising from scheduled repairs and replacement of machinery and equipment. Reserve maintenance fund is maintained to meet the expenses arising from unexpected extraordinary maintenance or replacement costs. Any excess cash in the reserve funds after allocating to all the funds above is transferred to surplus fund.

3. Rate Covenants: This covenant in the trust indenture is about pricing the products and services sold by the enterprise. A minimum charge can be set so as to meet the debt servicing obligation and other expenses of the enterprise.
4. Revenue Claim Priority: It should be clearly mentioned as to who can legally tap the revenue of the issuer before it is allocated to the various funds in the structure.
5. Issue of Additional Bonds: The conditions that are applied in case the enterprise goes for additional bond issue with the same lien are to be mentioned in the trust indenture.
6. Other Covenants: Other covenants like maintenance and auditing of accounting records, procedure for review of condition of facility, maintenance of equipment etc., are to be mentioned in the trust indenture.

Posted Date: 9/11/2012 1:08:20 AM | Location : United States







Related Discussions:- Assessing creditworthiness of an issuer of bond, Assignment Help, Ask Question on Assessing creditworthiness of an issuer of bond, Get Answer, Expert's Help, Assessing creditworthiness of an issuer of bond Discussions

Write discussion on Assessing creditworthiness of an issuer of bond
Your posts are moderated
Related Questions
There are some misconceptions about securitization: Poor quality originators end up in securitizing their assets. A bank's best mortgage

1. What is a venture's present value? Does the past matter? What is meant by the statement, "If you are not using estimates, you are not doing a valuation?" 2. Define (a) requ

XYZ Ltd is a manufacturer and distributor of agricultural equipment. XYZ produces milking machines and supplies as well as being the sole Australian distributor of machinery from t

Working capital cycle (operating/trading/cash cycle) It is the time between paying for goods supplied and final receipt of cash from their sale. It is desirable to keep cycle a

Gretz Tool Company is a large U.S based Multinational Corporation with subsidiaries in eight different countries. The parent of Gretz provided initial cash infusion to establish ea

Q. Working Capital as a Percentage of Total Assets? This approach of estimation of working capital requirement is based on the fact that the total assets of the firm arc consis

91-Day T-Bills Starting from July, 1965, 91-day T-bills were issued at a discount rate ranging from 2.5-4.6 percent per annum. Till July, 1974, the discount rate was 4.6 percen

Question: You have been appointed as the head of the treasury of Platza International, an automobile firm with many subsidiaries abroad. The management of Platza International

What are the assumptions of MM(Modigliani Miller) approach?

Considering the following information, what is the price of the share as per Gordon's Model?  Details of the Company