Madden Roarke Case Scenario
Madden Roarke, CFA, is a fixed income analyst for Goldrick & Kildow PLC (GK), an investment management firm. Roarke has been asked to provide an analysis of Windmiller, Ltd., a manufacturer of automobile components. GK’s bond portfolio has a large holding of Windmiller bonds and its manager, Elizabeth Ferguson, is worried that the rating agencies may lower their ratings on the debt.
In order to learn more about Windmiller, Roarke reviews recent news reports. From these, he learns that the firm’s CEO is 83 years old and in poor health. The reports note that the CEO is widely credited for Windmiller’s recent turnaround, but that industry insiders are surprised that there is no evidence of succession planning in place.
Roarke gathers balance sheet information from Windmiller’s most recent financial reports, which he summarizes in Exhibit 1.
The Windmiller bonds held in the GK portfolio are currently rated A by the major rating agencies. Using information from Windmiller’s balance sheets and income statements for the last two years, Roarke has calculated the values of a variety of financial ratios. In addition, he has determined the median values for these ratios for bonds of various ratings and provides the information in Exhibit 2.
Ferguson is considering adding asset backed securities to the portfolio and asks Roarke to compare the rating process for asset backed securities to the rating process for corporate bonds.
Roarke makes three statements:
Statement 1: Collateral typically plays a much greater role in a securitization’s rating than in a bond’s rating. Statement 2: In the typical securitization, there are few operational or business risks to consider relative to those found in a corporation.
Statement 3: The servicer’s quality plays a much greater role in determining an asset-backed security’s rating than the firm’s management quality does for a bond.
43. Ferguson’s concern is best described as:
A. default risk.
B. downgrade risk.
C. credit spread risk.
Answer: B
“General Principles of Credit Analysis,” Frank J. Fabozzi, CFA 2009 Modular Level II, Volume 5, p. 162
Study Session 14-52-a Distinguish among default risk, credit spread risk, and downgrade risk. “…the risk attributable to a lowering of the credit rating (i.e., a downgrading) is referred to as downgrade risk.” (p. 162)
44. The news reports provided information about which of the traditional measures of credit?
A. Capacity
B. Character
C. Covenants
Answer: B
“General Principles of Credit Analysis,” Frank J. Fabozzi, CFA 2009 Modular Level II, Volume 5, pp. 165, 175-182.
Study Session 14-52-b Identify, explain, and analyze the key components of credit analysis, including both the borrower and the instrument.
The news reports focus on the CEO’s status and the firm’s (lack of) succession planning, which are issues of corporate governance. Corporate governance is a component of a firm’s character, which is one of the traditional “4 C’s” of credit (capacity, collateral, covenants, and character).
45. Using standard ratio analysis and the balance sheet information in Exhibit 1, the change in Windmiller’s short-term solvency from 2007 to 2008 is best described as:
A. unclear.
B. improved.
C. deteriorated.
Answer: A
“General Principles of Credit Analysis,” Frank J. Fabozzi, CFA 2009 Modular Level II, Volume 5, pp. 167-168. Study Session 14-52-c Calculate, critique, and interpret the key financial ratios used by credit analysts.
46. What characteristic of Windmiller’s balance sheet most clearly suggests that its debt has an investment grade rating rather than a junk (high yield) bond rating?
A. The level of inventory and its change from 2007 to 2008.
B. The level of bank loans and its change from 2007 to 2008.
C. The level of retained earnings and its change from 2007 to 2008.
Answer: B
“General Principles of Credit Analysis,” Frank J. Fabozzi, CFA 2009 Modular Level II, Volume 5, pp. 182-185. Study Session 14-52-f Identify, explain, and interpret the typical elements of the corporate structure and debt structure of a high-yield issuer and the impact of these elements on the risk position of the lender.
High-yield (speculative or junk ratings) issuers commonly rely on bank financing rather than capital markets (bonds). Not only does Windmiller have very little bank debt, the amount decreased from 2007-2008. The level of inventory is ambiguous and the fact that inventory increased could be a negative sign. Retained earnings can grow at firms of all ratings, so it is an ambiguous indicator.
47. Given the information provided in Exhibit 2, the most likely outcome is that Windmiller’s bonds:
A. will be downgraded.
B. will retain their current rating.
C. will be placed on negative outlook.
Answer: B
“General Principles of Credit Analysis,” Frank J. Fabozzi, CFA 2009 Modular Level II, Volume 5, pp. 163-165, 205-206.
Study Session 14-52-d Evaluate the credit quality of an issuer of a corporate bond, given such data as key financial ratios for the issuer and the industry. Although the ratios provided in Table 2 have all decreased from 2007 to 2008, they remain much closer to if not above the median values for the bonds’ current A rating.
48. Which of Roarke’s statements regarding the ratings process is most likely false?
A. Statement 1.
B. Statement 2.
C. Statement 3.
Answer: C
“General Principles of Credit Analysis,” Frank J. Fabozzi, CFA 2009 Modular Level II, Volume 5, pp. 188-190. Study Session 14-52-j Contrast the credit analysis required for corporate bonds to that required for 1) asset-backed securities, 2) municipal securities, and 3) sovereign debt.
The role of the servicer is simply to collect cash flow coming from the collateral (asset) pool.
The servicer makes no investment decisions, and typically cannot change or increase the collateral pool. In contrast, corporate management makes all sorts of business decisions that can alter the firm’s willingness and ability to repay its bonds.
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发表于 2009-7-1 15:25
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