Credit research refers to a detailed study of a company’s credit history and repaying capacity to know its creditworthiness and underlying risks. Credit research is performed by commercial banks, other money lending institutions, rating agencies, and fixed-income fund managers. Credit research involves analysis of a company’s past financial performance and current financial position. Credit research analysts deeply study a company’s cash-generating abilities and credit history. All findings are summarized in a Credit research report.
Commercial banks and other money lending institutions require credit research for their lending decisions, how much credit to offer, and at what terms (interest rates, maturity, etc.) are determined based on findings in the credit research report. Rating agencies perform credit research to issue credit ratings to companies, their various credit issues, and governments. Credit research is also performed by Fixed income asset managers; these are investors in the fixed-income space who want to buy return-maximizing credit securities given their risk targets.
Credit research is a very daunting and time-consuming process. It involves the analysis of Income statements, balance sheets, Cashflow statements, debt covenants, and other pertinent information about an organization. Credit analyst uses various analytical tool such as Coverage ratios, 5C analysis, etc. Existing debts of various seniorities are analyzed deeply. 5C analysis is a very widely used credit analysis technique. It involves the analysis of the following five factors:
- Capacity: Analysis of the repaying capacity. It is performed through coverage ratios, assessing the sufficiency of Free cash flow to the firm (FCFF) and the sensitivity of revenues and earnings.
- Capital: An organization should have sufficient equity capital to be called creditworthy. Equity capital provides a cushion to the debt holders by absorbing initial losses first before the claims of debt holders get affected.
- Collateral: In the event that the borrower is unable to repay debt from its cash balance, collateral is used by the lender to settle its claim. Collateralized debt is safer and hence cheaper.
- Condition: A business does not operate in isolation; industry and Economic conditions play important roles. Hence, repaying capacity should be judged in relation to various inside and outside factors.
- Character: It refers to the reputation of a business in dealing with lenders. Superior credit history is a big positive in future credit as well.
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As soon as we receive a project request from the client, we add that to our project pipeline and set the final deadline. Then we review and request the missing documents/data from the client. In the meantime, our operation manager assigns respective tasks to respective analysts based on their competencies and sets a deadline for each. After the completion, the QC team takes over the project and checks for errors in 2-3 steps. After confirmation, our managing director quickly looks at the project and then delivers it to the client before the final deadline.
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