标题: downgrade risk and spread risk [打印本页] 作者: mdfb79 时间: 2011-7-13 16:52 标题: downgrade risk and spread risk
company holds bank debt, reset notes,and senior debt
S&P want to downgrade company, but current company bond price doesn't reflect downgrade risk, so do we have both downgrade risk and credit spread risk.
what's the difference between credit spread risk and downgrade risk, when downgrade,
credit spread widen, so we will definetly have credit spread risk if we have downgrade risk?作者: kkn006 时间: 2011-7-13 16:52
Downgrade risk is the potential risk of having your debt downgraded (Nothing profound there). If your L/T debt is downgraded then it will drive up the cost of new borrowing. An investor will not buy the same debt, that's been downgraded, without receiving additional yield due to the perceived risk of the company.
Your cost of equity would likely rise as well. If bond holders expect a premium for their investments you can be sure that equity investors would as well. As a result of the downgrade your WACC would rise as well.
Credit spread risk is the risk that the difference between the YTM of LT debt and that of a comparable benchmark index widens/rises. A company does not have to be downgraded for this to occur. As prices of their L/T fall, yield&ytm rise, this induces a widening of the credit spread.
