What Is a Credit Analyst?

The DSCR is a measure of the level of cash flow available to pay current debt obligations, such as interest, principal, and lease payments. Rating agencies like Fitch and Moody’s employ teams of credit analysts to assess the credit risk of publicly traded companies. This fixed income credit analysis supports debt ratings that are used to price fixed income securities, which trade publicly (like corporate bonds). Alternatively, many credit analysts leverage their skills to transition into relationship or sales roles within banking.

Using the insights of credit analysis in equity investing

When the downside potential for a borrower is far greater than that of traditional borrowers, the importance of in-depth credit analysis increases because of the uncertainty. Often, some of the more important contractual terms in the financing arrangements that lenders pay close attention to include debt covenants and the collateral pledged as part of the signed contract. Higher margin and return ratios are an indication that a company has a greater ability to pay back debts.

Bureau of Labor Statistics (BLS), the estimated wage range for credit analysts in 2020 was $50,060 to $164,750. Employment is offered at a variety of financial institutions, including banks, investment companies, credit unions, credit rating agencies, insurance companies, and asset management companies. Analysts who work in securities, commodity contracts, and other areas of financial investments earn the highest salaries. The term credit analyst refers to a financial professional who assesses the creditworthiness of securities, individuals, or companies. Coverage ratios measure the coverage that income, cash, or assets provide for debt or interest expenses. The higher the coverage ratio, the greater the ability of a company to meet its financial obligations.

1. Or, a bank may analyze the financial statements of a small business before making or renewing a commercial loan.
2. Alternatively, many credit analysts leverage their skills to transition into relationship or sales roles within banking.
3. A company can be considered strong for credit purposes when it has a cost structure that allows it to produce generally higher-than-average profits during all phases of its business cycle.
4. The analyst may recommend reducing their credit limit, closing their account, or offering them a new credit card with a lower interest rate.
5. The risk rating is derived by estimating the probability of default by the borrower at a given confidence level over the life of the facility, and by estimating the amount of loss that the lender would suffer in the event of default.

Leverage Ratios

Typically on a quarterly basis and using what are indirect materials definition and examples trailing twelve months (“TTM”) financials. Affirmative (or positive) covenants are specified tasks that a borrower must complete throughout the tenor of the debt obligation. In short, affirmative covenants ensure the borrower performs certain actions that sustain the economic value of the business and continue its “good standing” with regulatory bodies. In return for this security (and collateral protection), bank debt has the lowest expected return, while unsecured lenders (similar to equity shareholders) demand higher returns as compensation for the additional risk taken on. If a borrower were to breach a debt covenant in place, this would constitute a default stemming from the violation of the credit agreement (i.e., serving as a restructuring catalyst). But in most cases, there will be a so-called “grace period”, whereby there may be monetary penalties as stipulated in the lending agreement but time for the borrower to fix the breach.

Is a Credit Analyst a Good Job?

The actual salary you receive as a credit analyst depends on many factors, such as your location, the type of industry you are in, and the specific employer you work for. The average salary for credit analysts varies significantly between cities in the US. Credit analysts evaluate and analyze the financial risk of investments, individuals, or businesses. As a credit analyst, you will work as a finance professional, calculating the chance that an entity can pay back a financial obligation, such as a loan. You’ll predict the expected loan return by analyzing critical financial information as part of your daily duties. Yes, a credit analyst can be a good job if you have an interest in accounting or finance, along with a desire to help companies and consumers make decisions regarding the extension of credit and the reduction of financial risk.

Debt Covenants in Credit Analysis

Indicators of a strong competitive position include a business strategy that appears consistent with industry trends and is adaptable to changes in the market. A strongly competitive company also demonstrates track records of product development, service quality, and customer satisfaction and retention. Strong companies may also benefit from high barriers to tax freedom day by state competition with strong patent and copyright protection, protective regulations, and franchise, permit, or licensing agreements. Negative covenants restrict borrowers from performing actions that might damage their creditworthiness and impair lenders’ ability to recover their initial capital.

One objective of credit analysis is to look at both the borrower and the lending facility being proposed and to assign a risk rating. The risk rating is derived by estimating the probability of default by the borrower at a given confidence level over the life of the facility, and by estimating the amount of loss that the lender would suffer in the event of default. We also discussed risk versus return when investing in credit and how spread changes affect holding period returns. In addition, we addressed the special considerations to take into account when doing credit analysis of high-yield companies, sovereign borrowers, and non-sovereign government bonds. The following table contains some of the more common credit analysis ratios used to assess the default risk of borrowers, at the brink of insolvency (i.e. near financial distress).

The top-paying industries for credit analysts are monetary authorities (central banks); securities, commodities, and financial investment companies; insurance carriers; and business support firms. The states with the highest employment levels for credit analysts are California, New York, Texas, Florida, and Illinois. In addition, the less collateral that can be pledged; hence, borrowers have to seek riskier debt tranches to raise more debt capital after a certain point.

We also provide an example of a typical career path to help you envision if this is the direction you want to pursue. Our coverage focuses primarily on analysis of corporate debt; however, credit analysis of sovereign and nonsovereign, particularly municipal, government bonds will also be addressed. Structured finance, a segment of the debt markets that includes securities backed by such pools of assets as residential and commercial mortgages as well as other consumer loans, will not be covered here. While leverage ratios assess whether the borrower has an excess level of leverage on its balance sheet, the coverage ratios confirm whether its cash flows can cover its interest expense payments. Credit analysts play a pivotal role in companies by assessing financial risk through the analysis of financial information. Using the results from this analysis, credit analysts provide recommendations on whether a loan or other request for credit becomes granted or rejected and what the particular terms of the deal are.

Credit analysis is also used to estimate whether the credit rating of a bond issuer is about to change. By identifying companies that are about to experience a change in debt rating, an investor or manager can speculate on that change and possibly make a profit. According to Lightcast™, the average annual salary for credit analysts in the United States is $92,186 [1].

They decide whether the borrower has adequate cash flows by comparing ratios with industry data benchmarks. For example, a credit analyst working at a bank may examine an agricultural company’s financial statements before approving a loan for new farm equipment. Some factors may have only an indirect impact on a company’s financial positions, but they may still provide significant dimensions of a credit analysis. Industry risk considers how the industry’s business dynamics, legal and regulatory climate, and market factors could impact the performance of the individual company. Leverage ratios compare the level of debt against other accounts on a balance sheet, income statement, or cash flow statement. Today, Standard & Poor’s, Moody’s, and Risk Management Association can all provide banks with industry ratios.

Credit Analysts and Credit Ratings

Credit analysts who assess bonds often work at credit rating agencies such as Moody’s or Standard & Poor’s (S&P). Insurance companies are also rated on their credit risk and financial stability by rating agencies such as AM Best. Banks can use financial data to determine whether they want to approve certain loans by analyzing how much risk is involved in lending. If a loan is approved, the credit analyst monitors the borrower’s performance and may recommend terminating the agreement if it becomes risky.

These factors may be environment-oriented, such as economic changes, stock market fluctuations, legislative changes, and regulatory requirements. If a business client struggles to meet payroll, it could be indicative of a decline in revenue and potential bankruptcy, which may affect the bank’s assets, ratings, and reputation. These ratios help analysts and investors determine whether individuals or corporations are capable of fulfilling financial obligations. For a corporation looking to receive a loan or other credit, you analyze their financial statements, identifying their income as a first step. You then specify the company’s debt and assets to determine how large of a loan they qualify for. Additional factors you may consider include income growth, how much market share they hold, and their trustworthiness.

Determining the level of risk in a loan or investment helps banks manage risks and generate revenue. Analysts evaluate the risk investments hold and determine the interest rate and credit limit or loan terms for a borrower. They use their research to ensure the borrower receives an affordable loan and the lender is protected if the borrower defaults. When dealing with individuals or companies, the main goal of credit analysts is to determine the client’s creditworthiness. To do this, you’ll need to consider all relevant financial information to provide a thorough recommendation on how to proceed.