Credit analysis is the financial analysis used for determining the creditworthiness of an issuer using various quantitative and qualitative factors. The four Cs an analyst should remember while analyzing the credit worthiness of a bond issuer are - Character, Capacity, Collateral and Covenants.
The analysis of quality of management is very important as it reflects the management's ability to run the business efficiently, which in turn decides the ability of the issuer to pay the debt. The ability of the issuer to pay the interest and principal can be analyzed using various tools like ratio and cash flow analysis.
Covenants in the indenture are also to be considered by an analyst. A covenant can either be affirmative or negative. While the former is promise of the debtor to do certain things, the latter forbids the borrower from doing certain things.
The debt structure of a high-yield issuer may contain various instruments like bank debt, broker loans, reset notes, senior debts etc. Special consideration is to be given to these as the presence of these in the debt structure can make the bond more risky. The study of the corporate structure of the firm shows the extent of support that can be expected from subsidiaries in meeting the debt obligation from issuing the bond.
The various areas mainly focused by the rating agencies while analyzing the asset-backed securities are quality of the collateral, quality of the servicer, payment structure and the legal structure.
Tax debt bonds and revenue bonds are two types of municipal bonds. Analysts should focus on the debt structure of the tax debt bonds to analyze their credibility. Factors to be considered while analyzing revenue bonds are- security limitations, funds flow structure analysis, rate covenants, revenue claim priority, issue of additional bonds and other covenants listed in the trust indenture.