Standard & Poor's Fundamentals of Corporate Credit Analysis [NOOK Book]


An authoritative, in-depth guide to all aspects of credit analysis from the experts at Standard & Poor's

Credit analysis—gauging an issuer's ability to repay interest and principal on a bond issue—plays an essential role in determining how bond issues are rated and priced. Fundamentals of Corporate Credit Analysis provides both analysts and investors with the practical, up-to-date information they need, backed by Standard & Poor's ...

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Standard & Poor's Fundamentals of Corporate Credit Analysis

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An authoritative, in-depth guide to all aspects of credit analysis from the experts at Standard & Poor's

Credit analysis—gauging an issuer's ability to repay interest and principal on a bond issue—plays an essential role in determining how bond issues are rated and priced. Fundamentals of Corporate Credit Analysis provides both analysts and investors with the practical, up-to-date information they need, backed by Standard & Poor's research, data, and experience, to properly assess the credit risk of virtually any entity.

Whether used as a handy all-in-one guide or as a comprehensive training tool, it will give anyone the knowledge and tools needed to dig beneath standard ratings and determine an organization's true creditworthiness.

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Product Details

  • ISBN-13: 9780071454582
  • Publisher: McGraw-Hill Education
  • Publication date: 12/30/2004
  • Sold by: Barnes & Noble
  • Format: eBook
  • Edition number: 1
  • Pages: 428
  • Sales rank: 940,227
  • File size: 4 MB

Meet the Author

Blaise Ganguin is a managing director in Standard & Poor's Corporate & Government Ratings. Ganguin supervises teams of corporate credit analysts in Europe.

John Bilardello is a managing director in Standard & Poor's Corporate & Government Ratings. Bilardello manages S&P's global corporate ratings business.

Standard & Poor's is the world's foremost provider of independent credit ratings, indices, risk evaluation, investment research, data and valuations. An essential part of the world's financial infrastructure, Standard & Poor's has played a leading role for more than 140 years in providing investors with the independent benchmarks they need to feel more confident about their investment and financial decisions.

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The McGraw-Hill Companies, Inc.

Copyright © 2005The McGraw-Hill Companies
All rights reserved.
ISBN: 978-0-07-145458-2



Sovereign and Country Risks

"The reality is that most emerging market corporate defaults are caused by basic country risks."

—Laura Feinland-Katz, Managing Director, Standard & Poor's

Sovereign governments can wield vast powers that shape the financial and operating environments of all corporate entities under their reign. They establish the legal rights of the people, the regulatory framework, and the fundamental rules of engagement for businesses. Of course, that means that a sovereign government can create an environment in which business truly flourishes or an environment that stifles opportunities and success. Yet while the actions and decisions of a national government certainly have a great impact on the business environment, the basic economic and business dynamics that develop within a country are influenced by more than just the government's actions.

In particular, each country has its own unique characteristics that shape the businesses and corporations in that country. This includes its infrastructure, including roads, ports, telecommunications, utilities, buildings, a labor force, an educational system, a legal system, financial markets, and natural resources, and the businesses that develop around that infrastructure.

The combination of these unique characteristics and the government's established business rules influence the country's economic performance and thus the performance of individual companies. Ultimately, the degree of corporate success or failure comes down to how well the available resources are used in conjunction with the governing business regulations. Most of the time, however, this is usually a case of the haves and the have-nots. Well-developed countries generally support business success because they have abundant natural resources, a well-trained or well-educated workforce, strong fiscal and/or monetary policy, a stable currency, a reasonable level of taxes and tariffs, a sophisticated domestic capital market, a strong banking infrastructure, and established businesses supported by an effective infrastructure.

In contrast, "emerging" countries (or lesser-developed countries) stifle business success because neither the business community nor the sovereign government has been able to utilize the nation's assets effectively. In Africa, for instance, many countries have tremendous amounts of natural resources that are valued highly by other countries, such as oil, gold, and diamonds. One could assume that numerous successful businesses would emerge from countries with such resources. Sadly though, in some of these countries, corrupt governments and a poor educational system limit or even prevent business success. As a direct consequence, corporations based in these countries are viewed as being of high risk.

This sovereign risk analysis is not just for entities in emerging countries. In 2003, the World Bank released a survey entitled "Doing Business" that found that the least amount of business regulation fosters the strongest economies. The bank, working with academics, consultants, and law firms, measured the costs of five business development functions in 130 nations. The survey identified how regulations and legal systems affected an entity's ability to register with the sovereign government, to obtain credit, to hire and terminate employees, to enforce contracts, and to utilize the bankruptcy courts. The World Bank determined that the least regulated and most efficient economies were in countries with well-established common law traditions. This includes the United States, the United Kingdom, Australia, Canada, and New Zealand. In addition, other top-performing economies were several social democracies (Denmark, Norway, and Sweden) that had recently streamlined their business regulations. See Table 1-1 for comparative growth rates of different countries.

Strong credit analysis, therefore, includes evaluating the extent to which corporations are limited or supported by the government's laws and regulations. Importantly, future business success can also be linked to the physical aspects of a country, such as the natural resources, the infrastructure, and the labor pool. This chapter breaks down the analysis into five critical drivers about the country and its sovereign government that influence the business environment. These risk drivers are the sovereign powers, the political and legal risks, the physical and human infrastructure, the financial markets, and the macroeconomic environment.


The financial condition of a sovereign government always affects the way it governs and the laws it creates. Yet not all sovereign governments are the same. There are democracies, dictatorships, and kingdoms, with different histories and with styles of governing that can be and usually are very different. As credit analysts or lenders of credit, though, we care about the main powers every government has under its control that affect the business performance of every company within that government's domain.

The main power is first and foremost the overarching right to create and change business regulations. Next, of course, is the taxing and tariff authority, and last is the ability to enact foreign currency exchange controls. Regardless of the type of government or whether the government is corrupt or upstanding, these are the issues a credit analyst cares about. Why? Simply because these are the key tools a government has that allow it to access money and affect the business environment. But sovereigns use these tools for different reasons and at different times.

Regulatory Framework

A national government can establish business rules that range from invasive to vague, and it's necessary to know the difference and the impact on business. Regulations can cover a very wide range of areas, including export/import restrictions, competition boundaries, service quality guidelines, antitrust legislation, subsidies, and the percentage of local or foreign ownership. Regulations can and do affect individual companies' business strategies. Politics being what it is, analysts should investigate the extent to which any company has influence over the political process, since that could affect the form and content of regulations. Also, analysts should track a government's history of changing the rules. For example, a government could force renegotiation of tax subsidies or royalty arrangements and could change the amount of taxes on imports, exports, or foreign debt. The characteristics of a supportive government differ depending on whether one is analyzing a local or a foreign entity (i.e., the magnitude to which it supports the local entities). Still, a supportive environment would include at least consistent business regulations.


Tariffs, or taxes paid by foreign companies trying to sell their goods in a country, are another way in which a government can extract money from corporations. But tariffs typically have another purpose—to influence the economics of a foreign entity's goods and thereby reduce the demand for those goods, to the obvious benefit of local suppliers.

The most recent example was the tariffs the U.S. government placed on steel imports in the middle of 2002. The impact was to raise the price of foreign steel sold into the United States, allowing the struggling U.S. steelmakers to also raise prices. While this did benefit the U.S. steel companies for about one year, it ultimately did not improve their financial performance enough. In addition, foreign steelmakers effectively rallied their governments' support, and those governments then threatened tariffs on

Excerpted from FUNDAMENTALS OF CORPORATE CREDIT ANALYSIS by BLAISE GANGUIN. Copyright © 2005 by The McGraw-Hill Companies. Excerpted by permission of The McGraw-Hill Companies, Inc..
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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Table of Contents


Foreword Ed Emmer          




Chapter 1 Sovereign and Country Risks          

Chapter 2 Industry Risks          

Chapter 3 Company-Specific Business Risks          

Chapter 4 The Management Factor          

Chapter 5 Financial Risk Analysis          

Chapter 6 Cash Flow Forecasting and Modeling          


Chapter 7 Debt Instruments and Documentation          

Chapter 8 Insolvency Regimes and Debt Structures          

Chapter 9 Estimating Recovery Prospects          


Chapter 10 Putting It All Together: Credit Ranking          

Chapter 11 Measuring Credit Risk: Pricing and Credit Risk Management          


Appendix A AT&T Comcast          

Appendix B The MGM/Mirage Merger          

Appendix C Kellogg's Acquisition of Keebler          

Appendix D Repsol/YPF          

Appendix E Air New Zealand          

Appendix F Peer Comparison: The Three Largest U.S. Forest Products

Appendix G Yell Group Ltd. Leveraged Buyout (LBO)          


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