Chapter 10

Credit analysis and distress

prediction
Adelia Rizkarunissa
Arief Gust
Kintan Imanda
Why do firms use debt financing?
• Corporate interest tax shield
• Management incentves for value creaton

Cost of debt financing

If company is unable to meet interest/principal repayment
obligations, it will increase likelihood of financial distress

Negative consequences of financial distress for firm

• Legal costs of financial distress

• Costs of foregone investment opportunites
• Costs of conflicts between creditors and shareholders
 The market for credit
Below is major suppliers for debt financing:

• Commericial banks: mostly in short-term deposits

• Non-bank financial insttuton: often seek investements of long
duraton
• Public debt markets: measure underlying credit strength of firm and
determines yield offered to investors
• Sellers who provide financing: only if bank financing is unavailable
 Country differences in debt
financing
• Country factors and credit types
Orientaton of a country’s bankruptcy laws can affect the characteristcss of credit
provided in various ways:
• Multple-bank borrowing
• Supplier financing
• Off-balance-sheet financing
• Public debt
• Country factors and the optmal mix of debt and equity
in countries with borrower-friendly, creditor-unfriendly bankruptcy laws:
• Creditors extend more short-term debt
• Companies make greater use of supplier financing
• Companies make greater use of off-balance-sheet financing
• Public debt markets tend to be more developed