Manage Money and Income Sucessfully

Almost all bonds of companies being upgraded into investment grade show a significant spread tightening long before the actual rating action.  Of course at the time of the upgrade technical factors (new previously restricted buyers emerge) tighten the spreads further.

This is an effort to categorize the evaluation of Fallen Angels. Only the most important points are mentioned. In a first step, the analyst has to decide whether the company falls into the category stressed or distressed. The following points should help in the decision-making process. A distressed credit is very likely to default, and break-up value has to be determined. A stressed credit has a realistic chance for a turnaround and one has to estimate how likely this case is.

Companies that have a successful turnaround will show most of the following characteristics:

• Successful deleveraging and improvement of the liquidity situation is realistic.
• Asset Sales can be done in an adequate time and at acceptable levels.
• Debt maturity profile is improved by refinancing (new bank lines and bond issues).
• Additional rights issue is feasible.
• Capital structure option is exercised in favor of bondholders and the equity market rewards these steps as well.
• Corporate actions (reduction of CAPEX, postponement or cancellation of acquisitions, cost cutting, solid management of working capital).
• Change of management.