What Credit Analysis Does BondSavvy Conduct When Evaluating Investments?


BondSavvy identifies undervalued corporate bonds it believes can outperform the market.  To identify these corporate bonds, we must understand how bonds are priced relative to their credit risk and interest-rate risk.  Please see the below slide that was part of the May 31, 2018 edition of The Bondcast.  It reviews the key metrics we examine when evaluating corporate bond investments.  Below the table is a description of the select terms.  Click here to view this sample edition of The Bondcast.


Leverage Ratio: 
Total debt divided by EBITDA. If this ratio is low (1-2x), it means the company has a low amount of indebtedness (“leverage”) relative to its earnings. High-yield issuers have higher debt levels relative to earnings and have Leverage Ratios typically between 4-8x. Note that “EBITDA” is an acronym for Earnings Before Interest, Taxes, Depreciation & Amortization. It shows how much cash a company generates from operations and what it has to pay its interest, taxes, and capital expenditures.

Interest Coverage Ratio:
EBITDA divided by interest expense. The higher this is, the more cash flow a company has to pay its interest expense. If Interest Coverage is low, a company may have difficulty paying interest if its business hits a rough spot. Interest Coverage is usually 2-4x for high-yield issuers and often over 10x for investment-grade issuers. 

Upcoming Maturities
If a company doesn't have a bond maturing for seven years, chances are it's going to be money good between now and then unless the company can no longer cover its interest payments.  If, however, a company has many near-term maturities, is struggling financially, and has questionable ability to refinance its upcoming maturities, bondholders can be in for a tough ride.

Liquidity
We want to understand all sources available to pay for interest expense, capital expenditures, and upcoming debt maturities.  To do this, we evaluate the company's cash on hand, investments, and capacity on any bank lines of credit.

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