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Credit assessment for recovery companies

Retail investors should remain cautious as sentiment turns up
Credit assessment for recovery companies

Credit investors are smarter than their counterparts on equity desks. It’s a bold statement but not an uncommon view, based on rising corporate bond yields being a precursor of trouble. If credit prices have sold off first, the simple argument is bond investors saw the difficulties for companies coming earlier.

On the secondary market, with the due diligence written into covenants, credit investors are asking just one question at the micro level: will this company stay solvent and remain a going concern until the bond is redeemed? Thanks to coupons and the return of the principle being a fixed amount, nothing else matters to them (apart from moral considerations to do with the issuer’s business).

Contrast that with equity investors. They are constantly assessing whether and by how much profits will rise; costs and margin progressions; how much free cash will be left after investment (and interest payments) to pay dividends with; what is the fair value of assets?

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