Credit comps
Hope everyone is having a great weekend. Had a question on credit comps - a lot of times I will see people comparing ytw and leverage. Shouldn’t the right way to be thinking about comps is ytw and loan to value. For example, you can have a 5x levered company with an EV of 7x, versus a 10x levered company with an EV of 30x. If you do the first approach, you would think the 10x levered company is riskier, however if you take into account the total EV, it’s actually less risky. Any thoughts appreciated.
Work at a credit HF and yes, you look at LTV and 3/4-year yield for loans and YTW for HY bonds when RVing.
Thanks brah, is that EV your valuation or the markets ?
A large portion of the loan universe is private companies, so you need to have your own view of valuation
why 3/4 year yield? why not use z-dm for loans
Who said you have to limit the comp to just yield and leverage? Most HY sell side analysts do this since it’s easy and IG analysts will use LTV more often but you should feel free to comp as many different metrics as you want. When I look at credit comps I look at price, yield, gross/net lvg (both on reported mgmt ebitda and cash), spread/dm and spread/dm per turn, gross/net ltv, and ufcf/lfcf %of debt just to get a standardized take across the universe and I’ve liked the results
your RV comps should be within the same industry
To your example, argument can be made that the 10x levered Co is more risky on a cash flow basis regardless that it has a massive equity cushion at 30x EV.
If it does 10m EBITDA, with Debt of 100m with a cost of debt of say 8%, that's 8m interest which leaves 2m cash flow (before taking capex, tax, WCAP etc). so the risk of cash flow insolvency is much larger than the 5x levered company. Also makes you question why the 10x leveraged would ever have a 30x EV if it was a cash flow valuation (realise you just put random multiples for example sake)
So think the practical impact of looking at leverage is valid
Yeah but in your example, if there is cash flow insolvency, the debt holders would just liquidate and be made whole. You could argue that it could be riskier for the equity holders. Also, if the capital markets are still in good shape, they could just refinance.
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