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Ratings

The document provides information for estimating bond ratings and costs of debt for different types of firms. It gives tables with interest coverage ratio thresholds that correspond to bond ratings from AAA to D and the associated default spreads. It also provides an example calculation showing an interest coverage ratio of 5, an estimated bond rating of A, and estimated default spread and cost of debt of 1% and 7% respectively for a large manufacturing firm.

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170 views3 pages

Ratings

The document provides information for estimating bond ratings and costs of debt for different types of firms. It gives tables with interest coverage ratio thresholds that correspond to bond ratings from AAA to D and the associated default spreads. It also provides an example calculation showing an interest coverage ratio of 5, an estimated bond rating of A, and estimated default spread and cost of debt of 1% and 7% respectively for a large manufacturing firm.

Uploaded by

Anonymous SA40GK6
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as XLS, PDF, TXT or read online on Scribd
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Sheet1

Inputs for synthetic rating estimation


Enter the type of firm = 1 (Enter 1 if large manufacturing firm, 2 if smaller or riskier firm, 3 if fin
Enter current Earnings before interest and taxes (EBIT) = 10000 (Add back only long term in
Enter current interest expenses = 2000 (Use only long term interes
Enter current long term government bond rate = 6.00%
Output
Interest coverage ratio = 5.00
Estimated Bond Rating = A
Estimated Default Spread = 1.00%
Estimated Cost of Debt = 7.00%

For large manufacturing firms For financial service firms


If interest coverage ratio is If long term interest coverage ratio is
> to Rating is Spread is greater than to
-100000 0.199999 D 10.00% -100000 0.049999
0.2 0.649999 C 7.50% 0.05 0.099999
0.65 0.799999 CC 6.00% 0.1 0.199999
0.8 1.249999 CCC 5.00% 0.2 0.299999
1.25 1.499999 B- 4.25% 0.3 0.399999
1.5 1.749999 B 3.25% 0.4 0.499999
1.75 1.999999 B+ 2.50% 0.5 0.599999
2 2.499999 BB 2.00% 0.6 0.799999
2.5 2.999999 BBB 1.50% 0.8 0.999999
3 4.249999 A- 1.25% 1 1.49999
4.25 5.499999 A 1.00% 1.5 1.99999
5.5 6.499999 A+ 0.80% 2 2.49999
6.5 8.499999 AA 0.50% 2.5 2.99999
8.50 100000 AAA 0.20% 3 100000

For smaller and riskier firms


If interest coverage ratio is
greater than to Rating is Spread is
-100000 0.499999 D 10.00%
0.5 0.799999 C 7.50%
0.8 1.249999 CC 6.00%
1.25 1.499999 CCC 5.00%
1.5 1.999999 B- 4.25%
2 2.499999 B 3.25%
2.5 2.999999 B+ 2.50%
3 3.499999 BB 2.00%
3.5 4.499999 BBB 1.50%
4.5 5.999999 A- 1.25%
6 7.499999 A 1.00%

Page 1
Sheet1

7.5 9.499999 A+ 0.80%


9.5 12.499999 AA 0.50%
12.5 100000 AAA 0.20%

Page 2
Sheet1

ller or riskier firm, 3 if financial service firm)


dd back only long term interest expense for financial firms)
se only long term interest expense for financial firms)

ervice firms
rest coverage ratio is
Rating is SpreadOperating
is Income Decline
D 10.00% -50.00%
C 7.50% -40.00%
CC 6.00% -40.00%
CCC 5.00% -40.00%
B- 4.25% -25.00%
B 3.25% -20.00%
B+ 2.50% -20.00%
BB 2.00% -20.00%
BBB 1.50% -20.00%
A- 1.25% -17.50%
A 1.00% -15.00%
A+ 0.80% -10.00%
AA 0.50% -5.00%
AAA 0.20% 0.00%

Page 3

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