Lesson 2 of 6 · 11 min
Quantitative factors: the four things to measure
Quantitative credit analysis forecasts a company's financial statements to measure four drivers of default risk: profitability, leverage, coverage and liquidity.
In short
- Financial models turn the analyst's view into numbers, built top-down (macro, industry, event risk), bottom-up (issuer revenue drivers and balance sheet) or a hybrid of both.
- The aim is not to value the equity but to estimate whether the firm can meet its debt obligations and how that changes over the credit cycle.
- Profitability: strong, stable, recurring operating earnings. Leverage: reliance on debt. Coverage: income or cash flow relative to debt service. Liquidity: short-term resources to pay near-term obligations.
- Debt investors want lower leverage; equity investors usually gain from higher leverage. Both benefit from higher profitability and coverage.
- IG senior unsecured investors focus almost entirely on POD; HY investors facing subordination or relying on collateral also weigh LGD.
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