Year 3 · Applied Finance · Credit Analysis
Credit Analysis
Learn how credit analysts evaluate a borrower’s ability and willingness to repay debt through business risk, leverage, coverage, cash flow, capital structure, covenants, recovery and downside analysis.
LEARNING OBJECTIVES
What you should be able to explain after this lesson
01
Explain how credit analysis differs from equity analysis.
02
Evaluate business risk, financial risk, leverage and debt-service capacity.
03
Use coverage ratios, free cash flow and liquidity analysis to assess repayment capacity.
04
Understand capital structure, seniority, security, covenants and recovery.
05
Interpret credit spreads, ratings and market-implied risk.
06
Build downside and stress cases to test default and refinancing risk.
CONCEPT MAPFrom borrower quality to downside protection
Equity asks how much upside exists; credit first asks whether you get repaid
CORE FACTS · SAME IN EVERY MODE
Credit investors focus on downside protection, repayment capacity and probability of default.
Bond upside is typically capped relative to equity, while downside can be significant if credit quality deteriorates.
Credit analysis emphasizes stable cash flow, leverage, liquidity and contractual protections.
The same company can look attractive to equity holders and unattractive to creditors depending on capital structure and risk.
BeginnerTeaching style changes, knowledge does not.
If you own a bond, your main goal is usually to receive interest and get your principal back. You care less about unlimited upside and more about whether the company can keep paying.
COMPARISON
Equity vs credit lens
| Question | Equity | Credit |
|---|---|---|
| Primary objective | Maximize upside | Protect repayment |
| Key risk | Earnings / valuation | Default / recovery |
| Capital structure focus | Residual claim | Seniority and security |
PROFESSIONAL VOCABULARYDefault risk / risque de défaut Recovery / recovery
Risk that a borrower fails to meet contractual debt obligations.
Value creditors recover after a default or restructuring.