Creditworthiness assessment

From the investor s perspective, risk management can be implemented by credit research, which focuses on the analysis of creditworthiness of a company. As a first step, the company s sector(s) is screened. If a sector is sensitive to economic changes, it is strongly affected by a slowdown. So cyclical sectors tend to have lower average creditworthiness than more resistant sectors. Additionally, the competitive situation within the sector is of interest. To assess this situation criteria like the number of competitors, their market shares, their strategies, and strengths have to be scrutinized. 

However, these legal provisions do not completely isolate the credit-worthiness of the SCF from external factors, but only limit the extent to which credit risk contamination may occur. For this reason Moody s, when granting ratings, begin their analysis by assessing the creditworthiness of the SCF itself. They achieve this by principally analyzing ... 

Investors should review the lender s origination process, the lending criteria for the loans and any warranties for that specific transaction. This review should consider the extent of the origination process, where the lender obtains its business and what resources are available to perform it. Any procedures for assessing the creditworthiness of the borrower will be important, particularly for the smaller borrowers, as well as the valuation process. 

To assess credit risk, individual investors are made aware of the issuer s creditworthiness by agencies such as Standard Poor s, Moody s, Fitch, and other bond-rating firms. Often, to make an issue more attractive, an issuer— usually a company or a municipality—will seek the stellar reputation of an underwriter (Salomon Smith Barney, Merrill Lynch, etc.) and now, as additional strength, will include a layer of insurance in the deal—all to reassure investors that credit risk is minimal. 

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