SD-02.3 — Credit Research & Analysis

Business Domain: BD-02 Securities Research & Selection (Front office) · Applies: PUB

Purpose

Analyses a debt issuer and its instruments for creditworthiness, relative value and default / recovery risk. Credit research is the fixed-income counterpart of fundamental equity research, and it is asymmetric: a bond’s upside is capped, so the analysis is downside-focused — what happens if the issuer breaches a covenant, is downgraded, or defaults. It produces the credit view, the internal credit rating and the relative-value call; the buy / sell / hold decision built on them is SD-02.5.

Service Operations

• Assess creditworthiness — analyse the issuer against the Four Cs: Capacity, Collateral, Covenants, Character.
• Analyse covenants — review the indenture and capital-structure terms that protect the creditor.
• Estimate default and loss — model probability of default, loss given default and expected loss.
• Run downside and recovery analysis — assess the recovery a holder would see under default, liquidation and recession scenarios.
• Analyse relative value — compare the instrument across the credit curve and the capital structure using spread measures (G-spread, Z-spread, option-adjusted spread).
• Maintain the internal credit rating — the firm’s own methodology-driven issuer rating, kept current as a standing artefact.
• Author the credit note — record the analysis, the rating and the view.

Inputs and outputs

• Inputs: the research set (SD-02.1); bond indentures and issuer financials; rating-agency reports; spread and yield-curve data; the new-issue calendar.
• Outputs: the internal credit assessment, the relative-value call and a credit note — consumed by SD-02.5 (the recommendation), SD-02.6 (the thesis) and the portfolio managers of BD-05; the internal credit rating is also consumed by BD-07 Investment Risk.

Entities

• Consumes: Debt Instrument (PB-02), Legal Entity (E-01, the issuer), Price & Market Data (E-08); the SD-02.1 research set.
• Owns: E-38 Internal Credit Rating — the firm’s own methodology-driven rating on an issuer or instrument, versioned through rating-change events. Each version names the rating-methodology version (E-22) in force, the analyst, the rating-committee date and the watch status; the set of versions is the standing rating history the mandate-compliance audit, the rating-migration analytics and the back-tested credit-spread relationship all run on. The rating is distinct from and cross-checked against the external rating agencies; a divergence is the analyst’s call to defend. The credit note remains an analytical artefact.

Standards

• The CFA Institute Four Cs of credit analysis and the credit-risk models (probability of default, loss given default, expected loss), and Standard V. Internal-rating methodology is the firm’s own; it is distinct from, and cross-checked against, the external rating agencies.

Open extensions

• The relationship between the internal credit rating and the risk function’s use of it in BD-07.
• The rating methodology itself as a typed structure — moving beyond a Metric Definition reference to a structured representation of the rating model.