Fundamental credit analysis tries to understand the creditworthiness of a borrower.
What this means is you analyze someone that wants to borrow money or someone that is borrowing money. They can also be called an issuer if they are issuing debt that others may buy in a public bond market.
You want to know whether a company has the ability to repay their debt. I use phrases such as loans and debts interchangeably.
There are different structures with debt.
There are different priorities on who gets paid back first if a company or person goes bankrupt.
Debt is often categorized as secure or unsecure based on whether the debt being borrowed or issued has collateral that backs it. Meaning, some debt is safer because the lenders of the debt will have a priority for assets against the loans if a company or person goes bankrupt. This makes some loans safer than others (for example, unsecured debt, which has no collateral).
Basically, credit analysis analyzes and comes up with a credit risk profile for a borrower, whether that is a person, individuals, company or whatever entity is wanting to borrow.
As a credit analyst, your job is to make an assessment as to how risky it is to lend to a borrower and what they are capable of borrowing.
Based on the risk profile, you can come up with borrowing limits and recommend them based on that research.
This is a simple description of what credit analysis is.
Common Questions:
Does this mean you decide how much to lend? No not always. You are a part of a team sometimes, and all you are doing is the credit analysis and sharing that research and recommendation.
Does this mean you spend a lot of time speaking with clients/lendrs? It depends, but from my experience, this is more of a back office role where you do work for an investment banking team that is more client facing. You are a support team/person.
How do you do credit analysis? I’ll answer in more detail in a future post/page as we prep for credit analyst interviews but essentially, you will look at financial statements, historical data, public information, and trends for whatever industry/country that can help you.
More to come in the future! Happy interview prepping!.