Corporate credits quality, analysis

Selecting individual corporate bonds with a favourable risk/return relation requires a precise analysis of risks and setting comprehensible assessment rules. For this reason rating models have been developed and presented here for various industries that help to evaluate the credit quality of corporations. 

Since the credit quality of a corporation may vary over time, permanent credit assessments are indispensable so that the bond can be sold in time before a rating downgrade or, respectively, to achieve the appropriate risk premium at any time. In credit assessments, investors fall back on data published in annual or quarterly reports, but also estimate future values based on extensive scenario analysis. These are factors such as debt ratio, liquidity, and profitability of the corporation that are of importance for credit assessment. 

This analysis is targeted at separating corporations of good and poor credit quality on the basis of a set of data (e.g. financial ratios). A discriminant function can, for example, be formulated as follows ... 

As explained above, it is important for the formation of the discriminant function to know whether a corporation belongs to the group of good or poor credit quality before the analysis starts. This means that corporations must already be rated to be appropriate for building and testing the model. The requirement of an existing rating by at least... 

On the basis of the selected appropriate financial ratios that show significantly different group means for industrial corporations of good and poor credit quality and are additionally fundamentally clear indicators, a quantitative rating model is developed with the help of discriminant analysis. 

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