INDEX

CONTENTS PAGE NO.

EXECUTIVE SUMMARY 4

OBJECTIVES 6

REVIEW OF LITRATURE

ASSET MANAGEMENT 7

PRIVATE PLACEMENT 10

PRIVATE PLACEMENT MEMORADUM 20

SECURITIES AND EXCHANGE COMMISSION 23

BONDS 25

PROCESS OF ISSUING BONDS 29

CORPORATE BONDS 31

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BOND RATINGS 34

INVESTMENT BANKING FIRMS 41

CREDIT RESEARCH PROCESS

CREDIT RESEARCH PROCESS 44

(The Real Thing)

CREDIT WRITE UP 47

METHODOLOGY 50

OBSERVATIONS AND FINDINGS

TOOLS OF FINANCIAL ANALYSIS 52

CONCLUSION 56

RECOMMENDATIONS 57

LIMITATIONS 58

BIBILIOGRAPHY 59

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 EXECUTIVE SUMMARY

The project title given to me is “Asset Management – Credit Research Process”.

The project is totally related to U.S. financial market. It relates to as how the companies

in U.S. raises money by issuing bonds through Private Placement markets and how

very few selected companies invest in these bonds.

A Private Placement is a place where only a few selected companies can invest in other

companies bonds, the majority being Life Insurance Companies.

Securities and exchange Commission (S.E.C.) is the financial market regulator in the

U.S. But, for an issue in a Private Placement, it is not necessary to get registered with

S.E.C. (an exemption provided by S.E.C under section 4(2) of US Security Act of 1993.

Before a bond issue in the Private Placement market, the issuing company has to issue a

Private Placement Memorandum (PPM) containing information about the company,

and all the terms and conditions. In between the issuing company and the investing

companies, there exists a third party-Investment Banking Firms. These firms act as an

agent between the issuer and the investors who tries to make the deal a success.

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In the U.S. financial market, there are various types of bonds that are traded. The focus of

this project is simply concentrated on U.S. corporate bonds – bonds that are issued by

corporate in U.S.

During a bond issue, there are various ratings that are being assigned to the bonds that

are being issued. The two best-known raters are Standard and Poor (S&P) and

Moody’s. The ratings parameters ranges from the companies’ financial background to

companies forecasted future profits. The ratings are in the form of grades ranging from

AAA (highest quality with lowest risk) to C or D (lowest quality with highest risk).

The project “Credit Research Process” focuses on as how to find out that a particular

company is an attractive investment designation or not by finding out the

creditworthiness of the concerned concern.

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 OBJECTIVES

The objective of the project is to find out that how to determine whether a particular

company is an attractive investment destination or not. As the project is regarding

Asset Management for a financial concern, the objective is regarding the management of

their Assets – how they manage them i.e. how to invest in other companies by giving

them credit. For giving the credit, the financial concern has to find out the

creditworthiness of the firm, among other things, and that’s the main goal of our project.

Apart from the above stated objective, the other objectives of the project are stated

below:

1) To find out what the term “Asset Management” means to a financial concern?

2) To know about Private Placement markets, its process and the investors.

3) To find who regulates the financial markets in the U.S?

4) To know about various types of bonds those are traded in U.S. and the process of

their issue.

5) To know more about U.S. Corporate bonds and their types.

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6) To know why various ratings are assigned to bonds in the U.S., the raters and their

rating process.

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 REVIEW OF LITERATURE

ASSET MANAGEMENT

In simple words, the term “Asset Management” means Management of Assets. The

meaning may seems to be very simple to look and read, but in reality it is very much

complex. The term Asset Management has a wide concept, (though said in just two

words), but its scope is very wide. The term means Management of all types of Assets,

whether fixed or current.

So, Asset Management means management of all types of Assets (both fixed and

current) of a business concern.

DEFINE

…”Asset management is the process of managing money for individuals, typically

through stocks, bonds and/or cash equivalents. Professional investors manage these assets

according to specific stated objectives or investment styles”.

…”Asset management is the process of managing money for individuals, typically

through stocks, bonds and/or cash equivalents. Professional investors manage these assets

according to specific stated objectives or investment styles”.

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…”The process of managing demand and guiding acquisition, use and disposal of assets

to make the most of their service delivery potential, and manage risks and costs over their

entire life”.

…”Asset Management is a business discipline for managing the life cycle of

infrastructure assets to achieve a desired service level while mitigating risk. It

encompasses management, financial, customer, engineering and other business processes.

True asset management is not a system you can buy, but is instead a business discipline

enabled by people, process, data, and technology”.

IN THIS PROJECT, THE FOCUS WILL BE ON ASSET MANAGEMENT FOR A

FINANCIAL CONCERN.

FINANCIAL CONCERN

A Financial Company is one whose business is to invest its funds in other companies or

businesses. The earnings of such a company are the returns that it earns on its investment.

Such a company has its Assets mostly in the form of Liquid Assets such as Accounts

Receivables; Cash in hand, Bank balance, investment in Short-term and Long-term

Marketable Securities, Accrued interest, etc. It may also have some Fixed Assets in the

form of land and building, but that is of negligible Amount.

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ASSET MANAGEMENT FOR A FINANCIAL SERVICES FIRM

A Financial Company has Assets mostly in form of Liquid Assets. It invests heavily in

other companies and businesses. Such a company may have lot of Bad Debts if its

creditors don’t pay on time or never pay up. So, a financial company has to manage its

Assets in such a way so as to minimize the risk of Bad Debts and increase its rate of

return.

A Financial Company will prefer mostly to invest in a Manufacturing Concern because of

regularity in payment of both the Interest and the Principal. But, if it does not get its

money back in time, then it may face liquidity crunch.

So, a Financial Company should manage its Assets such that it is able to maintain its

liquidity and continue investing in profitable ventures.

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CREDIT PROCESS BY A FINANCIAL CONCERN

A Financial Firm can give credit to other companies or business by way of investing in

their Equity or Bonds.

In the US context, a Financial Concern can give credit to other businesses by investing in

their Bonds or Equity issued either through Public Market or Private Placements

Markets.

CREDIT PROCESS

(Financial Concern)

Investment Investment

EQUITY BONDS (Fixed Income)

Market Market

PUBLIC/PRIVATE

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IN THIS PROJECT, THE FOCUS WILL BE ON THE THE CREDIT RESEARCH

PROCESS OF PRIVATE PLACEMENTS BONDS MARKET.

PRIVATE PLACEMENTS-INTRODUCTION

Private placements (PPs) are the quiet corporate finance deal, private with a

capital "P".

PPs have been around for more than 50 years. They emerged in the wake of the US

Securities Act of 1933, which sought to protect individual investors from bankrupt

companies. An exemption to the law allowed companies to offer securities

privately to "qualified institutional buyers." And so the PP market was born,

bringing together sophisticated institutional investors and those requiring finance.

The PP market has enjoyed significant growth since then, particularly in the last 20

years. The majority of PP investors are in the US (where the range of deals tends

to be wider and PPs are an established form of financing for growing companies),

but issuance is now global, with market growth estimated at 15 to 25 per cent a

year during the last five years. The PP market is currently worth about $450bn.

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NEED

Businesses of all size regularly require infusions of capital in order to break into the next

plateau, penetrate new markets or to sustain overall growth. While there is a multitude of

financing sources available to these business owners, each source has its own inherent

limitations, requirements and benefits.

Dealing with commercial banks in a traditional lending scenario can be ideal for

established companies with a proven track record of profitability. However, growing

businesses do not have this same option do to the fact that they may not meet the strict

requirements of most contemporary lending institutions. Although less seasoned than

their established contemporaries, these up-and-coming companies still possess merit and

creditability and fortunately, have practical options for financing. Private Placements are

an attractive alternative for growing companies for a variety of reasons.

MEANING

In legal terms, the term, ‘Private Placement’ means an agreement between a willing

seller and a willing buyer(s) to exchange an unlisted, negotiated, registered promissory

note tailored to the requirements of both parties. An intermediary agent, who works to

make the deal a success, brings the lender and the borrower together.

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A Private Placement is a market (in US) where companies can raise funds by issuing

bonds or stocks without being registered with Securities and Exchange Commission

(SEC, Financial Market Regulator in US). The investors in Private Placements Markets

are Institutional Investors such as Banks, Mutual Funds, Insurance Companies, Pension

Funds and Foundations who directly invest in the securities or take the help of Investment

Bankers who act as an agent for both the parties and make the deal a success, where the

deal size ranges from very small, say US$ 30M to US$ 1 billion.

DEFINITION

… “A US Private Placement is the direct sale of unregistered securities by a company to

one or more sophisticated Institutional Investors. Principally Insurance Companies.

Section 4(2) of US Security Act of 1993 is the provision under which the Private

Placements are exempt from SEC registration. Formal ratings are not required to sell the

notes and the Investment Bank as an agent for the issuer and not as an underwriter for the

issue.”

… “ The sale of entire issue of unregistered securities (mainly bonds) directly to one

purchaser pr a group of purchasers (usually financial intermediaries).

 Eliminates the underwriting function of Investment Bnaker.

 The dominant Private Placement lender in this group is the Life Insurance

Category (Pension Funds and Bank Trust Departments are very active as well).”

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FEATURES

Investors are primarily insurance companies that typically utilize a "buy and

hold" credit intensive strategy.

The typical deal size amount ranges from US$50 million to US$300 million, with

amounts in excess of US$500 million not uncommon. Smaller deals are also possible.

Security Types: Investors generally prefer pari passu senior note structures.

Callable at "Make-Whole" (generally) at T+50.

Maturities range from 3 to 20 years with the deepest interest currently in 7 to 12

years.

Interest rates are fixed at the pricing date at a spread over US Treasury Notes of

a similar maturity to the privately placed notes. Floating rate availability.

Disclosure requirements typically entail a confidential offering memorandum

describing the Company's history, operations, strategy and financial performance,

along with a term sheet, the draft note purchase agreement and audited financial

statements.

Credit ratings are not required to complete a financing.

A typical timetable for an investment grade credit is between 8 to 15 weeks from

engagement to funding.

Investors view financial covenants as a package and not individually. The typical

package of financial covenants will address: net worth, leverage, and operating

performance. Financial covenants are valued by USPP investors. Investors generally

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 like to have the same covenant package as current or future bank facilities but they

will frequently provide more flexibility.

As the market has grown, documentation has been standardized over the

years. A group of investors, law firms and investment banks specializing in USPP's

and two investment banks under took a project to simplify and standardize USPP

documentation. This project led to the Model Form Note Purchase Agreement which

is now the standard for US private placements.

ADVANTAGES

1. There is a sizeable yield advantage: Depending upon various investment factors

(such the term, the credit risk, the structure), private placements can provide 50 to

200 basis points more than bonds issued by the same or similar issuers in the

public bond market.

2. Yield advantage can give rise to a stable source of alpha : Most benchmarks do

not include private placements in their universe. The added yield that private

placements offer provides an opportunity for portfolio performance to exceed the

benchmark. Also, this yield advantage can be less volatile than duration, curve or

sector rotation strategies towards investment grade transactions is inherently less

risky than investments in high yield bonds.

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3. These investments can be diversified : Private placements are not confined to

any particular sector, type of credit, or credit rating. As such, investors have the

opportunity to diversify their portfolio of private placements.

4. Terms are typically negotiable: Ordinarily, investors are able to negotiate the

terms of the bonds. This provides an opportunity to enhance safeguards for the

investor. For example, an investor may wish to broaden the nature and frequency

of financial disclosure, added tailored financial covenants, or improves remedies

for investment risks. Also, transactions can be structured to suit investor

preferences. There is no guarantee that issuers will accede to the investor's

desires in every circumstance but the opportunity to negotiate exists.

5. Only qualified institutions can invest: Investors must have significant

experience in investing in bonds in order to sufficiently understand the risks and

rewards of purchasing Private placements and only qualified institutional

investors are likely to have the knowledge and resources to adequately weigh risk

and make these Judgments.

6. Private placements: There is a ready market in which an investor may re-sell a

private placement. Other suitable investors within the QIB community would

have an interest in purchasing a private placement from a current holder.

7. Flexibility: Private Placements have a high degree of flexibility in regard to the

amount of money that can be raised. Private Placements can range in size from

less than $50,000 to upwards of $50 million. Private Placements come in a variety

of forms and may consist of debt, equity or a combination of debt and equity

financing.

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8. Low Share Price: The main advantage that most investors seek when investing in

Private Placements is that one can normally buy shares of the company for very

low prices while it is still a privately held company. The ideal investment in a

privately held company is to buy shares just before the company goes public.

Once a company begins trading its shares on a public stock exchange, stock prices

tend to rise dramatically, enabling the Private Placement investor to sell his/her

stock at much higher prices.

9. Business Friendly Investors: The Investors that fund the Private Placements are

more “Business Friendly” than lending institutions or venture capitalists due to

the fact that they are "hand-picked" by the company raising money for itself. The

company can establish their own terms for return on investment. As long as these

terms are fully disclosed and agreed to by all parties involved, a highly beneficial

capital raise can be completed in a relatively short period of time. The more

reputable the company and the more promising their outlook, the easier it is to

complete the Private Placements.

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THE PRIVATE PLACEMENT PROCESS

1) Preliminary Analysis: The first step in Private Placement process is to review

financial statements and compare this data to industry standards to determine

performance trends. In addition, future plans; management stability, competitive

environment, planned and current programs, and the regulatory environment

should be investigated. Next, reviewing of bond structures, call provisions,

maturities and other options is done for potential financing programs available to

the particular institution. Research is done to identify alternative financing plans,

interest rates and size of debt.. Once completed, the preliminary analysis is then

combined with project financing information for presentation and

recommendation to management.

2) Offering Memorandum: The Company develops the structured financing plan,

working with accounting firms, lawyers and rating agencies to design the most

cost-effective financing. Since ratings affect the marketability of an issue, it

should prepare the borrowers for rating service reviews, initial and updated, for

both written submissions and oral presentations. The preparation of the PPM

(private placement memorandum) is usually completed within the first six weeks.

3) Bond Marketing: The Company arranges for a direct private Placement of Bonds

with Institutional investors, and suggests terms and conditions that are in the best

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 interest of the borrowers. By the end of the marketing period, the interest rate is

set. The marketing period is usually completed in six weeks period.

4) The Closing Process: The closing process is usually a four- to six-week period.

The parties negotiate and agree to final bond covenants.

5) Monitoring: Proper monitoring of the borrowers financials should be done while

keeping track of market innovations to recommend appropriate financial changes.

BORROWERS IN PRIVATE PLACEMENT MARKETS

Mid-size firms in the United States are the primary traditional borrowers in the private

placement markets. These companies are defined by annual sales of between five

million and one hundred million dollars. They generally maintain single plant

operations, and the majorities are privately held. According to the 1987 U.S. Census of

Manufactures, single establishment firms employed 5 million American workers and

provided $212 trillion dollars of value added process to the United States economy

annually. These small, mostly private firms have limited access to capital. Because of

their size investors usually prefer debt financing to equity financing, and a substantial

debt to equity problem persists for middle market firms. Mid-size private companies seek

private placement debt issues because they are SEC exempt.

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LENDERS IN THE PRIVATE PLACEMENT MARKET

With the latest occurrences of accounting fraud in the stock market, the private

investment market is an attractive alternative for investors and small businesses. It also

allows investors to get involved in a company on the "ground floor" in many cases. A

Private Placement investor has the opportunity to keep a closer eye on their investment,

than a public market investor, and has the opportunity to reap large financial benefits by

getting in on the ground floor of what could be a hugely successful company.

Although various institutions hold some traditional Private Placements in their portfolios,

Life Insurance Companies purchase the great majority of them.

Example: The break-up of various investors in the Private Placement Market in a

particular year can be as shown in the following table:

Lender Share of the Market for Private Placement Markets in a

Particular year:

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 TYPE OF LENDER SHARE OF VOLUME (%)

Life Insurance Companies 82.6

Pension Funds 1.7

Financial Companies 1.4

Mutual Funds .7

Casualty Insurance Companies 1.4

US Commercial Banks 3.3

Foreign Banks 3.6

US savings and loans and mutual

Saving banks .7

US Investment Banks .9

Unknown 3.7

INITIATING A PRIVATE PLACEMENT

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In order for a business to initiate the Private Placement process, following conditions

must be satisfied-

 A Thorough Business Plan.

 A Private Placement memorandum (PPM) that fully discloses all the pertinent

facts of the investment and business.

 Potential Investors or a Placement Agent to locate potential Investors.

 Most importantly, a law firm or lawyer (Investment counselors) in Private

Placements and the creation of Private Placement Memorandums.

If an issuing company fails to qualify for the Private Placement exemptions relied upon,

it can face severe penalties and possible criminal repercussions.

RISK INVOLVED

(At best, putting money into a private company is high risk. At worst, it can turn out

to be a scam)

Some investors looking for better returns are wading into the high-risk territory of

"private placements," lending money to or buying stock in small private companies.

EXAMPLE: Invest private Inc., which raised about $17.6-million for itself and its

affiliates, document which were given to the investors misrepresented the company’ a

background, and the use of money it raised, which includes paying of company’s

Chairman personal expenses.

Some Potential Pitfalls:

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  The company may not do well or may even go out of business, a particular risk if

it is relatively new or has inexperienced management.

 Investors may have difficulty finding out how the company is doing financially.

 Investors may have difficulty getting their money out of the company since there

is no public market for the securities.

 The company may never go public, disappointing investors who buy stock hoping

for a big return.

 The offering might be found to be illegal if all the requirements for the

exemptions are not met. To meet these exemptions, securities generally cannot be

advertised to the public.

 A conflict of interest may exist if the company selling the investment benefit from

it.

A BUOYANT MARKET

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The US PP market recorded spectacular volumes in 2003, with nearly USD46bn of new

issuance. The 59% increase was boosted by a record amount of funds directed towards

this asset class by investors, predominantly US life insurers.

US Private Placement Market Historical Private Placement Issuance

PRIVATE PLACEMENT MEMORANDUM

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MEANING

The key requirement to conduct a Private Placement offering is the Private Placement

Memorandum or PPM; the legal document that includes all the disclosures required

by law so investors can make an informed decision as to the risk-reward scenario

before taking part in a private offering. The Private Placement Memorandum protects the

company as well as the investor by making perfectly clear that such transactions are

speculative in nature and should only be undertaken by individuals capable of sustaining

a loss of investment capital.

The Private Placement Memorandum and accompanying Subscription Agreement

guards the company from inadvertent non-compliance and also provides evidence of due

diligence in the event of a dispute.

DEFINITION

…” A confidential sales document that is provided to a potential sophisticated investor

for a private placement of bonds. The PPM contains relevant information about the

financial, economic and demographic characteristics of the borrower and its service

area.”

NEED

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The purpose of a Private Placement Memorandum is to disclose the material

information about the company and its business—especially the risk factors associated

with the investment in the company—to prospective investors.

The Private Placement Memorandum may not be technically required in very small stock

offerings to a few individuals who are sophisticated and who have access to all the

information they need about the company. However, a Private Placement Memorandum

is a useful way, in many circumstances, to prove that the company provided all-important

information to investors (in case the investment goes bad and investors insist on having

their money refunded).

PRINCIPLES

A complete Private Placement Memorandum needs to follow several important rules, so

it is necessary to consult with an experienced securities attorney when putting one

together. The following list contains some fundamental principles to adhere to when

creating a Private Placement Memorandum:

 Be certain that your statements are true.

 Don't mislead potential investors in any way.

 Don't omit any information that may affect the investor's decision.

 Lay out the risks to the potential investor.

 Provide proof of your statements.

 Don't exaggerate facts or projections.

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If you don't follow the rules to the letter, a number of adverse consequences can follow,

including possible civil and criminal penalties and the investor's right to demand his or

her money back. The advice of a good securities lawyer is absolutely essential in this

area.

CONTENTS OF PPM

1. Cover page.

2. Securities Legends.

3. Suitability Standards for Investors.

4. Summary of the Securities offerings.

5. Risk factors.

6. Capitalization of the Company.

7. Use of Proceeds from Securities offerings.

8. Dilution.

9. Plan of Distribution of Securities.

10. Selected Financial Data.

11. Management’s Discussion and Analysis of Financial Condition and Results of

Operation.

12. The Business of the Company.

13. Management and Compensation.

14. Certain Transactions (transactions between the Company and its shareholders,

officers, directors or affiliates).

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15. Principal Shareholders.

16. Terms of the Securities Offered.

17. Description of Capital Stock of the Company.

18. Tax Matters

19. Legal Matters.

20. Experts.

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S.E.C. – WHAT IT IS?

Formed by Securities Exchange Act of 1934, Securities and Exchange Commission is

the primary overseer and regulator of the U.S. securities markets.

Joseph P. Kennedy, President John F. Kennedy's father, was the first Chairman of

the SEC.

…”The SEC is an independent federal agency that oversees and regulates the securities

industry in the US, and enforces securities laws. It requires registration of all securities

offered in interstate commerce, and of all individuals and firms who sell those securities.

Established by Congress in 1934, the SEC sets high standards for disclosure about

publicly traded securities, including stocks, bonds, and mutual funds, and works to

protect investors from misleading or fraudulent practices, including insider trading. The

SEC has also helped to establish a competitive national market system known as

Intermarket Trading System (ITS) for trading securities, and set up”.

…” The federal agency created by the Securities Exchange Act of 1934 to administer that

act and the Securities Act of 1933. The statutes administered by the SEC are designed to

promote full public disclosure and protect the investing public against fraudulent and

manipulative practices in the securities markets. Generally, most issues of securities

offered in interstate commerce or through the mails must be registered with the SEC”.

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S.E.C. – WHAT IT DOES?

The Securities Exchange Act of 1934 empowers the SEC with broad authority over all

aspects of the securities industry. This includes the power to register, regulate, and

oversee brokerage firms, transfer agents, and clearing agencies as well as the

nation's securities self regulatory organizations (SROs). The various stock exchanges,

such as the New York Stock Exchange, and American Stock Exchange are SROs. The

National Association of Securities Dealers, which operates the NASDAQ system, is also

an SRO.

The Act also empowers the SEC to require periodic reporting of information by

companies with publicly traded securities.

The primary mission of the U.S. Securities and Exchange Commission (SEC) is to

protect investors and maintain the integrity of the securities markets.

The SEC requires public companies to disclose meaningful financial and other

information to the public, which provides a common pool of knowledge for all investors

to use to judge for themselves if a company's securities are a good investment.

BOND – WHAT IT IS?

In simple words, the term “Bond” means ‘a debt investment with which the investor

loans money to an entity (company or government) that borrows the funds for a defined

period of time at a specified interest rate’.

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Bonds are loans. When you buy a bond, you are lending money to a bond issuer in return

for a set rate of interest. The issuer agrees to repay your principal on a specified future

date.

BONDS – DEFINED

“A certificate of debt that is issued by a government or corporation in order to raise

money with a promise to pay a specified sum of money at a fixed time in the future

and carrying interest at a fixed rate” Generally, a bond is a promise to repay the

principal along with interest (coupons) on a specified date (maturity).

It is a tradable debt instrument that might be sold at above or below par (the amount paid

out at maturity), and are rated by bond rating services such as Standard & Poor's and

Moody's Investors Service, to specify likelihood of default. The Federal government,

states, cities, corporations, and many other types of institutions sell bonds. It is relatively

more secured than Equity and has priority over shareholders if the company becomes

insolvent and its assets are distributed”.

BOND MARKET

The market for all types of Bonds whether on an exchange or over-the-counter.

TYPES OF BONDS

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Most bonds that we come across have been issued by one of three groups: the U.S.

government, state and local governments or corporations. But to confuse things, these

entities issue many different types of bonds that run the gamut in terms of risk and

reward. Here's a quick introduction to the ones we encounter most:

1. U.S. GOVERNMENT BONDS: The bonds issued by U.S. Government are

called Treasuries. They're grouped in three categories.-

 U.S. Treasury bills -- maturities from 90 days to one year.

 U.S. Treasury notes -- maturities from two to 10 years.

 U.S. Treasury Bonds -- maturities from 10 to 30 years.

Treasuries are widely regarded as the safest bond investments, because they are backed

by "the full faith and credit" of the U.S. government. And there's another benefit to

Treasuries: The income you earn is exempt from state and local taxes.

2. MUNICIPAL BONDS: Municipal bonds are a step up on the risk scale from

Treasuries, but they make up for it in tax trickery. These bonds are non-taxable,

but there is a cost involved – they offer a lower coupon rate. But depending on

your tax rate, your net return may be higher than it would be on a regular bond.

3. CORPORATE BONDS: The bonds issues by corporations are called Corporate

Bonds. Corporate bonds are generally the riskiest fixed-income securities of all.

But, Corporate Bonds can also be the most lucrative fixed-income investment,

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 since you are generally rewarded for the extra risk you're taking. The lower the

company's credit quality, the higher the interest you're paid.

4. ZERO-COUPON BONDS: Zero-coupon bonds are fixed-income securities that

don't make interest payments each year like regular bonds. Instead, the bond is

sold at a deep discount to its face value and at maturity; the bondholder collects

all of the compounded interest, plus the principal.

POTENTIAL INVESTORS IN BONDS

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The most important financial investors in the market are institutional investors,

particularly in the large industrial countries. These include pension funds, insurance

companies, investment funds, and trust department of commercial banks.

PENSION FUNDS

(Most Important)

INSURANCE COMPANIES

(Second Most Important)

BONDS INVESTORS

INVESTMENT FUNDS

(Mutual Funds and Hedge Funds)

COMMERCIAL BANKS

(Trust Departments)

RETAIL INVESTORS

WHY INVEST IN BONDS?

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Ever heard about co-workers talking around the water cooler about a hot tip on a Bond? I

didn't think so. Tracking bonds can be about as thrilling as watching a chess match,

whereas watching stocks can have some investors as excited as NFL fans during the

Super bowl. But don't let the hype (or lack thereof) mislead anyone.

The bond market is not glamorous. When the economy is going strong, we rarely hear

talk at parties or read articles about the hottest bonds or bond funds. However, for the

conservative portion of our portfolio, bonds are usually among the best investment

choices.

These are the reasons why we should include bonds in our portfolio-

Safe Heaven for Investment: Investing in Bonds is safe. The underlying

assumption is that in comparison to Common Equity, which represents Ownership,

bonds represent Debt. So, Bonds enjoys a right for the repayment of money in

comparison to Common Stock Owners if the company goes into liquidation.

Financial Security: Who doesn't like the sound of “financial security”? There's a

reason that a bond is called a “fixed-income” security – not only the investors are

highly likely to get back your principal but can also count on receiving interest on

your investment.

Portfolio Balance and Diversification: Bonds can be great financial “buffers.”

When the stock market is on a roller-coaster ride, bonds can help steady our pulse

because they're a very safe financial tool to help balance the risk in your overall

portfolio.

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 Tax breaks: One of the not so well known facts about bonds is that they're very

often free from many taxes. For example, most bonds issued by state or local

governments (also known as “municipalities” or “munis”) are exempt from federal

income taxes.

Weighing the Risk: Probably the first thing we heard about investing is that it's

never risk-free. True enough. And although highly rated bonds are considered one of

the safest ways to invest your money, one should still take the risks into account

before making any decisions.

Rising Inflation: If inflation rises, the interest one make on your initial

investment will look low compared to bonds currently being issued. And with

investor money locked in a bond, they could lose some principal if they sell it in order

to move it into another investment that could give them a higher rate of return.

Selling the Bond Before Maturity: If we decide that we need our money back

earlier than the date that our bond matures, we are taking “a chance” that we may get

more, or less, than we paid. This depends mostly on the interest rates at which new

bonds are being issued. That's why individuals who invest in bonds typically plan to

hold them till they mature. And that's why it's important to determine when we will

want, or need, to reach our financial goal in order to purchase a bond that matures at

that same time.

THE PROCESS OF ISSUING BONDS

- 36 -
When corporations or government bodies need to raise money, they may sell bonds to the

public. Because this is a highly technical and complicated process, the issuing

organizations usually hire special parties to do this work for them.

Once an organization decides to issue bonds, how does it proceed?

1) BOND-BUYING PROCESS: When a corporation or government agency is

considering issuing bonds--or stocks, for that matter--it usually contacts an

investment bank for advice on the marketplace, the possible issuing price, and

other factors. An investment bank is a firm that serves as an intermediary

between the organization issuing the securities and the investors who purchase

them. The bond issuer itself does not sell the bonds.

Investment banks possess knowledge and expertise they need to reach investors.

Investment bankers generally have an excellent understanding of capital markets,

relevant government regulations, and other factors affecting a bond issue.

2) ISSUING OF BONDS BY INVESTMENT BANKERS : In acting as an

intermediary between the bond issuer and the bond buyer, the investment banker

serves as an underwriter for the bonds. When investment bankers underwrite the

bonds, they assume the risk of buying the newly issued bonds from the

corporation or government unit; they then resell the bonds to the public or to

dealers who sell them to the public. The investment bank earns a profit based on

the difference between its purchase price and the selling price. This difference

is sometimes called the underwriting spread.

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Sometimes the investment banker markets a new issue but does not underwrite it. The

investment bank simply acts as a sales agent under a best efforts agreement, promising to

do its utmost to market the bonds. The investment bank has the option to buy the bonds

and usually purchases only enough bonds to meet buyer demand, receiving a commission

on the bonds sold.

After the bond issuer and the investment banker have completed and filed all necessary

documents, they can begin to sell the bonds.

3) LOCATING BOND BUYERS: Investment bankers generally have a good

understanding of where and how to market newly issued bonds. They usually

have well-developed investment banking networks and may identify the

brokers and sales forces most able to market a particular bond offering.

Investment bankers sometimes have established networks with investors who

may be interested in the offering; they may encourage the investors to contact

brokerage houses, specifying what they want in a bond.

Investment bankers also may sell newly issued bonds through Private Placements to

large, institutional investors like insurance companies or government unit retirement

funds. If the bonds are purchased for investment and not for resale, they do not need to be

registered with the SEC. Regardless of the sales channel, most newly issued bonds are

sold through investment bankers.

CORPORATE BONDS – INTRODUCTION

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Corporate bonds are debt securities issued by private and public corporations.

Companies issue corporate bonds to raise money for a variety of purposes, such as

building a new plant, purchasing equipment, or growing the business.

When you buy a corporate bond, you lend money to the "issuer," the company that issued

the bond. In exchange, the company promises to return your money, also known as

"principal," on a specified maturity date. Until that date, the corporation usually pays you

a stated rate of interest, generally semiannually. While a corporate bond gives you an

IOU from the company, you do not have an ownership interest in the issuing corporation

—unlike when you purchase the company's stock.

DEFINITION

…”A bond issued by a corporation. Such bonds usually have a par value of $1,000,

are taxable, have a term maturity, are paid for out of a sinking fund accumulated for

that purpose, and are traded on major exchanges. Generally, these bonds pay higher

rates than government or municipal bonds since the risk are higher. Corporate bonds

have a wide range of ratings and yields because the financial health of the issuers can

vary widely. A high-quality blue chip company might have bonds carrying an investment-

grade rating such as AA (with a low yield but a lower risk of default), while a startup

might have bonds carrying a

“Junk bond” rating (with a high yield but a higher risk of default). If a company goes

bankrupt, both bondholders and stockholders can make a claim on the company's assets,

but the claims of bondholders takes precedence over that of stockholders in liquidation.”

- 39 -
FEATURES

All of these common features of corporate bonds are established at the time of issue.

Callability is the feature of a bond whereby the corporation that issued it can

redeem the bond before it matures. Corporations may call their bonds when interest

rates drop below their current bond rates. Call provisions must be made clear before a

bond is issued. These provisions include the call price, which is the price at which the

bond will be bought back from bondholders. The call price is usually above par.

A put provision is the privilege whereby the bondholder may redeem a bond at

its face value before it matures. Investors may want to do this when interest rates are

rising and they can take advantage of higher rates elsewhere.

Convertibility is the option of converting a bond into stock. Bonds with this

feature are called convertible bonds. They give the investor the option to convert the

bond into the issuing company's stock, usually the company's common stock. With

this provision, the company may have the option to pay investors in stock.

TYPES

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There are two main types of corporate bonds (high-quality and high-yield).

1) HIGH-QUALITY CORPORATE BOND: This type of bond carries an

investment-grade credit rating of BBB or higher from Standard & Poor’s or other

recognized ratings agencies. Many such bonds are issued by icons of American

business. These blue-chip companies include well-known marketplace brands

such as IBM and General Motors.

Why invest in high-quality corporate bonds? They offer attractive yields compared to

government securities, and are relatively safe, though not as safe as government

securities.

2) HIGH-YIELD CORPORATE BOND: Also called a junk bond, it is a security

with a credit rating below investment grade. Many such bonds are issued by

corporations that lack financial strength or proven track records.

Why invest in high-yield bonds? High-yield bonds provide a higher level of income

than government bonds and high-quality corporate bonds because of the higher credit risk

associated with them.

WHY OWN A CORPORATE BOND?

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There are three main reasons to own corporate bonds:

1. Valuation: Corporate bonds are yielding much more than Government bonds on a

relative and absolute basis. Their valuations are at levels not seen since the peak of the

last two recessions in 1982 and 1990 IN THE U.S.

2. Issuance: The issuance of government bonds is poised to decrease dramatically, which

will shift portfolios that have relied on government bonds to offset their liabilities into the

corporate bond market. This flow of funds will create a new level of demand for

corporate bonds.

3. Performance: Corporate bonds have historically outperformed

government bonds. There is no reason to doubt that good quality

corporate bonds will continue to outperform government bonds as we

move forward.

BOND RATINGS

HOW RISKY ARE CORPORATE BONDS?

- 42 -
Corporate bonds are fixed interest securities, so they are a low to moderate-risk

investment if you hold them until they mature.

The risk level of a corporate bond depends on:

 The credit rating of the company issuing the bonds.

 How each bond itself is ranked in the Capital Structure of the Company-

where it stands compared with other securities if the company was wound up?

WHY RESORT TO RATINGS?

When you’re saving and investing for the future, you want to rest assured that your

money is in the hands of a solid, reputable organization — in other words, that your

money is going to be there when you need it. You probably also want to know how these

assets are performing, relative to the risk level you’re comfortable with for meeting

your goals. Ratings of financial companies and investment funds can help answer

both of these questions.

WHAT IS A CREDIT RATING?

A credit rating is an independent assessment of the creditworthiness of a bond (note or

any security of indebtedness) by a credit rating agency. It measures the probability of

- 43 -
the timely repayment of principal and interest of a bond. Generally, a higher credit

rating would lead to a more favorable effect on the marketability of a bond. The credit

rating symbols (long-term) are generally assigned with "triple A" as the highest and

"triple B" (or Baa) as the lowest in investment grade. Anything below triple B is

commonly known as a "junk bond."

THE RATERS

There are a number of independent rating agencies that analyze and publish a credit

rating on companies and governments that have debt securities such as bonds

outstanding. The two best-known agencies are Standard & Poor’s and Moody’s. Each

of these agencies aims to provide a rating system to help investors determine the risk

associated with investing in a specific company, investing instrument or market.

CREDIT RATINGS – HIGHEST TO LOWEST

The ratings lie on a spectrum ranging between highest credit quality on one end and

default or “junk” on the other. Long–term credit ratings are denoted with a letter: a

triple A (AAA)) is the highest credit quality, and C or D (depending on the agency issuing

the rating) is the lowest or junk quality. Within this spectrum there are different degrees

of each rating, which are, depending on the agency, sometimes denoted by a plus or

negative sign or a number.

Here is a chart that gives an overview of the different ratings symbols that Moody's

and Standard and Poor's issue:

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 Bond Rating
Standard &
Grade Risk
Moody's
Poor's
Aaa AAA Investment Lowest Risk
Aa AA Investment Low Risk
A A Investment Low Risk
Baa BBB Investment Medium Risk
Ba, B BB, B Junk High Risk
Caa/Ca/C CCC/CC/C Junk Highest Risk
C D Junk In Default

Investment grade generally refers to any bonds rated Baa or higher by Moody’s, or BBB

by Standard and Poor’s.

Junk bonds are the lowest-rated corporate bonds. There’s a greater-than-average chance

that the issuer will fail to repay its debt. Investors were willing to take the risk because

the yields were so much higher than another, safer bonds.

HOW ECONOMICAL RATINGS CAN BE?

Obtaining wider market access typically translates into reduced funding costs,

particularly for higher-rated issuers -- as the graph illustrates:

- 45 -
The credibility of a rating from a respected and globally established rating agency

may thus allow issuers to enter capital markets more economically and more frequently,

and to sell larger offerings at longer maturities.

HOW BONDS ARE RATED?

Ratings Services shall provide a rating only when it believes there is adequate

Information available to form a credible opinion and only after appropriate analyses have

been performed.

The rating process begins with an application to the rating agencies by the issuer or its

agent either via a telephone call or in writing. The rating request is usually done several

weeks before the issuance of the bonds to allow time for the rating agencies to perform

their review and analysis.

Generally, the following documentations are provided to the rating agencies as soon

as possible:

The preliminary official statement,

Latest audited and unaudited financial statements,

The latest budget information, including economic assumptions and trends,

Capital outlays plans,

The bond counsel opinion addressing the authority and tax-exempt status of the

bond issuance,

All the legal documents relating to the security of the bonds, and,

- 46 -
 Any other document that may pertain to the bond issuance as requested by the

rating agencies.

Following this, a meeting is set up at the rating agency's or issuer's office to present the

credit worthiness. The credit analyst prepares a municipal credit report which discusses

key analytical factors. The credit analyst presents credit for "sign-off" with the senior

analyst and makes a recommendation for rating. The credit analyst makes a presentation

before a rating committee comprised of senior analysts. Finally, the rating is released to

the issuer, and then to a wire service, followed by a publication of full credit report.

ELEMENTS INVOLVES IN DETERMINING A CREDIT RATING

ECONOMIC FACTORS

 Evaluation of historical and current economic factors.

 Economic diversity.

 Response to business cycles.

 Economic restructuring.

 Assessing the quality of life in the given area.

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DEBT/ISSUE STRUCTURE

 Economic feasibility and need for project.

 Length of bond's maturity, short-term debt financing.

 Pledged security and other bondholder protections.

 Futuristic outlook: capital improvement plan.

FINANCIAL FACTORS

 Sufficient resources accumulated to meet unforeseen contingencies and liquidity

requirements.

 On-going operations are financed with recurring revenues.

 Prudent investing of cash balances.

 Ability to meet expenditures within economic base.

MANAGEMENT/STRUCTURAL FACTORS

 Organization of government and management.

 Taxes and tax limits.

 Clear delineation of financial and budgetary responsibilities.

ACCURATENESS OF CREDIT RATINGS

The first question that anyone legitimately raises about an opinion is the about the

accuracy of credit ratings. The following figure tracks Moody's record at predicting

defaults over the last 25 years.

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 The data show average

cumulative default rates for

corporate bond issuers at

each category over bond

holding periods of one to twenty years. In general, the lower the rating and the longer the

holding period, the higher the expected default rate.

The record is impressive. For example, the default rate on bonds rated Aaa has been

extremely low. Only 0.1% of Aaa-rated issuers on average have defaulted within five

years, and the average Aaa default rate over ten-year periods has been less than 1%. By

contrast, some 28% of B-rated issuers have defaulted after five years, 40% on average

after ten years.

So, the credit ratings are accurate enough for the potential investors to resort to them and

make a proper decision about investment.

LIMITATIONS OF THE RATINGS

Despite their widespread acceptance and use, bond ratings have some limitations that

are as follows:

- 49 -
  The two agencies may disagree on their evaluations.

 As most bonds are in the top four categories, it seems safe to argue that not all

issues in a single category (such as A) can be equally risky.

 Finally, it is extremely important to remember that bond ratings are a reflection

of the relative probability of default, which says little or nothing about the

absolute probability of default.

INVESTMENT BANKING FIRMS – WHAT THEY ARE?

Investment banking is the process of raising capital for businesses through public

floatation and private placement of securities. Investment banks work with companies,

governments, institutional investors and wealthy individuals to raise capital and provide

investment advice. Originally, investment banking meant the underwriting and

distribution of securities. Today investment bankers also invest a lot of effort into helping

companies design deals and the securities to finance them, and then use their brokerage

arms to sell the securities to the investing public, both retail and institutional.

- 50 -
ROLE OF MODERN INVESTMENT BANKS

The original purpose of investment banks was primarily raising capital and advising on

mergers and acquisitions. As banking firms have diversified, investment banks have come

to fill a variety of roles.

 Underwriting and distributing new security issues.

 Offering brokerage services to public & institutional investors.

 Providing financial advice to corporate clients, especially on security issues,

M&A deals.

 Providing financial security research to investors and corporate customers.

 Market-Making in particular securities.

Investment banks have also moved into foreign currency exchanges, private banking,

and providing bridge loans.

ROLE IN PRIVATE PLACEMENT PROCESS

Investment bankers also advise companies on private placements. Investment bankers

create value for their clients through three primary means:

 They possess an extensive network of industry and financial contacts,

 They create a competitive environment for the company's securities, and

 They possess current knowledge about matters such as transaction structuring,

legal processes, and comparable market events.

- 51 -
A Corporation in the private placement hires an investment banker to help it sell its

bonds. The investment banker functions as an agent between the issuing corporation and

the potential investors. The bank will match the issuer of the security with potential

investors in an offering which is not made available to the public. Investment banking

professionals concentrate their efforts on identifying alternative sources of capital and

on developing innovative techniques to match the interest of users and providers of

capital.

The Investment Banker guarantees the proceeds of the offering to the issuing firm by

purchasing the bonds. But, actually, it does not purchase them, instead agrees to help the

firm to sell the issue to potential investors. It may re-sell the securities at a price which is

higher than the offer price. The difference represents the fee for the banker.

The Investment Banking Firm performs the following roles during a private Placement

Issue:

Assisting the clients with their Private Placement Memorandum (PPM).

Researching potential investors appropriate for the company's financing stage

and industry sector.

Developing a Marketing plan for distributing the PPM and arranging individual

meeting between management and potential investors.

Coordinating due diligence and follow-up meetings.

- 52 -
 Obtaining and Negotiating indicative term sheets from interested investors.

Helping management and the Board to obtain the best available terms and

valuation.

Finally, managing the legal documentation and closing for the Private Placement.

CREDIT RESEARCH PROCESSS – PRIVATE PLACEMENTS

C O P I S
Customer Outpu Proces Inpu Supplie
t s t r

1
- 53 -

2345
 Gather data WHAT INPUT
Analyst • Company/ (financial/ • Requisition
Financial/ Industry operating/ 100%
for analysis •
Analysis industry) • 10K/ 10Q Brokerage
• Financial releases, Research Firms
Model reports, Previous • Credit
• Credit analysis by the Rating
monitoring Analyst/ PM agencies
• Portfolio • Industr
holdings update y groups
Aggregate
• Monitoring • Websit
required 100%
• Adhoc es/ Bloomberg
information
• Intranet
HOW RECEIVED site
Portfolio Analyze the 100% • Email, • Compa
Manager information. Dialcom, Online nies’ investor
client server access. relations
department
-DO- Present/ Submit • Earning
the information 100% s calls
Risk • Risk and analysis
Manager Monitoring Sheets
(Private Eye)
• Resolve
queries.
• Discuss 100%
to review
analytical
comments
THE PROCESS

The Credit Investment Process begins by first, identifying a particular

investment opportunity, i.e., identifying the company that is interested in issuing

Fixed Income Securities.

Then, the Actual Credit Research Process begins in which a research is

undertaken to decide whether the company is suitable for investment or not.

- 54 -
SUPPLIERS

First of all, various types of information about the borrowing company is

required by the investing company to make the research. That needed

information is supplied by Brokerage firms (who have extensive industry

network and financial contacts), Credit rating agencies (Standard & Poor,

Moody’s) and various industry groups (who are players of the same industry).

The investing company also finds information on its own through the borrowing

company’s website, its intranet site, Bloomberg’s, etc. It can also get the

required information from its own company’s investor relation department

which has good market knowledge.

INPUT

What?

Now the question arises, In what form the company needs information?

The necessary information can be in the form of Press releases about the

company, Financial Statements, Annual reports, Quarter releases,

Memorandum, Shareholder reports, etc. It can also be in the form of various

research reports that had been done by R&D departments of research making

companies, or it may be in the form of any previous analysis about the

company done by any Analyst or any Portfolio Manager.

- 55 -
How?

The company may get the required information through Dialcoms, Email,

Phone, Online client server access, or through post.

PROCESS

After receiving all the necessary required information (financial, operational,

about industry, etc.), the total aggregate information is taken together and an

analyst does a detailed in-depth analysis.

OUTPUT

The output of the detailed analysis in the form of total Company Analysis,

Industry Analysis and the Financial Analysis. The analyst prepares a financial

model (which is called 4 Blocker) and presents it to the Portfolio Manager. The

Portfolio manager does the all credit monitoring, portfolio updates, and

other monitoring.

PRESENTING OF FINAL REPORT

After a proper analysis is done, all the information along with the analysis is

presented before the Risk Manager. The Risk Manager does the whole risk

- 56 -
monitoring and risk analysis. He asks various queries out of the analysis and

try to resolve them. He functions as a Private Eye and prepares his own Risk

Monitoring Sheet from the detailed analysis. Finally, after all the queries have

been sorted out, a discussion is held to review the analytical comments of the

Analyst and a decision is taken.

CREDIT WRITE UP - PROCESS MAP

- 57 -
CREDIT WRITE UP

- 58 -
The complete analysis that is done by an Analyst is called a 4 Blocker. A 4

Blocker is the Monitoring tool for both existing and new investments. It is a one

page analysis and contains 4 Sections –

Company Overview and Sectoral Commentary.

Security Description and structure.

Financial Data.

Analyst Opinion and Outlook.

PREPARATION OF 4 BLOCKER

When a particular investment opportunity is identified, the Senior Analyst

request for a 4 Blocker that is prepared by Research Analysts.

The Research Analysts collects various types of information (company specific,

Financial, Industry type, Ratings and Holdings). They receive these information’s

from different sources like Internet, Bloomberg, Intranet, Websites Annual

Reports, Memorandum, etc.

If the received information is not enough, then various third parties are

contacted like Brokers, Trustee, etc. to supply more information on the borrowing

- 59 -
company. If still, enough information is not received, the Senior Analyst is

approached for recourse.

After the enough information is received, the aggregate information is taken

together and a proper in-depth analysis is done by Research Assistants.

If they still need additional information, they have to contact aforesaid third

parties to get it.

If the information is not received, the senior analyst is approached for

recourse.

If no further information is needed, the presentation is given before an

Analyst who gives his recommendations. The Analyst presents the information

to the senior analyst.

If Senior Analyst is not satisfied with the presentation, he asks for more

information. Then again, aforesaid third parties are contacted for desired

information. If they are not able to supply the needed information, the Senior

Analyst is approached for recourse.

If the Senior Analyst is satisfied and the presentation is acceptable to him, the

information and whole analysis is presented before the Senior Analyst in the form

of a 4 BLOCKER.

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METHODOLOGY OF CREDIT ANALYSIS

“Some say owning a home is the American dream. Millions of small business owners

will argue, however, that owning one's own business is really the American dream”.

But while it offers rewards, owning a business is not easy. A person needs finance to start

a business. He will borrow to start his business.

But, the lender will first, evaluate do his Credit Analysis and Financial Analysis before

giving him credit.

The basic components of credit analysis, the "Five C's," are described below what the

lender will look for.

THE "FIVE C'S" OF CREDIT ANALYSIS

CAPACITY to repay is the most critical of the five factors. The prospective

lender will want to know exactly how the borrowing company intends to repay the

loan. He will consider the cash flow from the business, the timing of the repayment,

and the probability of successful repayment of the loan.

CAPITAL is the money people personally have invested in the business and is an

indication of how much he has at risk should the business fail. Prospective lenders

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and investors will expect the borrowing concern to have contributed from their own

assets and to have undertaken personal financial risk to establish the business before

asking them to commit any funding.

COLLATERAL or guarantees are additional forms of security a borrower can

provide the lender. Giving a lender collateral means that they pledge an asset they

own, such as their home, to the lender with the agreement that it will be the

repayment source in case they can't repay the loan. Some lenders may require a

guarantee in addition to collateral as security for a loan.

CONDITIONS focus on the intended purpose of the loan. Will the money be used

for working capital, additional equipment, or inventory? The lender also will consider

the local economic climate and conditions both within the borrower industry and in

other industries that could affect their business.

CHARACTER is the general impression the borrowing company makes on the

potential lender or investor. The lender will form a subjective opinion as to whether or

not they are sufficiently trustworthy to repay the loan or generate a return on funds

invested in your company. The quality of your references and the background and

experience levels of their employees also will be taken into consideration.

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TOOLS OF FINANCIAL ANALYSIS

In addition to the "Five C's," a prospective lender will use four primary financial

statements to make a credit decision –

1) FINANCIAL STATEMENTS: Indicates a firm’s net worth. A financial

statement is important to the lender, particularly if the borrower have never

received financing for your business before, because it gives the lender evidence

of personal assets they could pledge to secure a loan.

2) BALANCE SHEET: Provides the lender with a snapshot of borrower’s

business at a specific time, such as the end of the year. It keeps track of

borrowing company's assets, or what the company owns (including its cash), and

the company's debts, or liabilities (generally loans from others). It also shows the

capital, or equity, put into the business.

3) A PROFIT OR LOSS STATEMENT: Shows the profit or loss for the year. The

profit and loss statement, also called the income statement, takes the sales for the

business, subtracts the costs of goods sold, and then subtracts other expenses.

4) A STATEMENT OF CASH FLOWS : Presents the sources of cash in your

business -- from net income, new capital, or loan proceeds -- versus the

expenditures, or uses of the cash, over a specified period of time.

- 63 -
 RATIO ANALYSIS

Another tool the lender will use is financial ratio analysis. Ratios permit review of a

company's current financial performance versus that of previous years. The lender

also may also use financial ratio analysis to consider how a company is doing when

compared to another company.

The following section presents some widely used ratios used by the lender from four

financial ratio categories: profitability, liquidity, leverage, and turnover to evaluate the

financial performance of borrowing concern.

Profitability

Profit is the compensation an entrepreneur receives for the assumption of risk in a

business venture. The profitable business must cover its overhead expenses and generate

profits for its owner out of its "after-product-costs" cash.

Gross Profit Margin

One commonly used measure of profitability is gross profit, which is sales minus

product costs. In ratio form, it is called the gross profit margin:

Gross Profit Margin = Net Sales - Cost of Goods Sold

Net Sales

- 64 -
Operating Profit Margin

Another measure of profitability is the operating profit margin. This is the core cash flow

source that is expected to grow year to year as one’s business grows, and it excludes

interest expense, taxes, and "extraordinary items" such as the sale of property or other

assets.

Operating Profit Margin = Operating Profit

Net Sales

Liquidity

How much cash does your business have on hand for immediate use?

Quick Ratio

The quick ratio shows what assets your business can immediately convert to cash, such as

the business checking account and money market accounts.

Quick Ratio = Cash + Marketable Securities + Accounts Receivable

Current Liabilities

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Current Ratio

The current ratio is a broader indication of liquidity because it includes inventory. In

general, lenders look for your current assets to exceed your current liabilities.

Current Ratio = Current Assets

Current Liabilities

Leverage

The leverage ratios measure the company's use of borrowed funds in relation to the

amount of funds provided by the shareholders or owners. These ratios tell the lender

how much money the borrowing concern has borrowed versus what money its

shareholders and other owners have put into your company. This is important because

borrowed money carries interest costs and your business must generate sufficient cash

flow to cover the interest and principal amounts due to the lender. Generally speaking,

companies with higher debt levels will have higher interest costs to cover each month, so

low to moderate leverage is nearly always viewed more favorably by prospective lenders.

Debt-Equity Ratio

The most important Leverage Ratio is debt-equity ratio. It tells about how much debt is

there in relation to shareholder’s fund in the total capital structure.

Debt-Equity Ratio = Long-Term Debts

Shareholder’s Funds

- 66 -
Turnover

The turnover ratios focus on the operating cycle of your business by examining its cash

flow. They show the amount of time it takes for cash to move through the accounts

receivable, inventory account, and accounts payable in your business.

The most important turnover ratio is the collection period ratio.

Collection Period Ratio

The collection period ratio indicates how quickly you collect the cash your customers

owe you. The earlier you collect it, the sooner you can put it to work purchasing more

inventory or paying for current orders; so the lower the number, the better.

Collection Period Ratio = Average Accounts Receivable X 365

Net Sales

- 67 -
 CONCLUSION

This dissertation project report has helped me to know how the real corporate world looks

like & how it functions.

Through this project, I get to learn about U.S. financial markets, their regulator, and

what are the various processes through which money is raised by U.S. Corporations.

This project also helps me to know many new things like ‘Private Placement’, the word

that I have not heard about earlier. I get to know who are the various types of investors

who invest in this peculiar type of market. As the project was very much related to

investment in the bonds, I get to learn about the types of bonds that are traded in the U.S.

markets and to know in deep about U.S. Corporate Bonds - their types, process of issue,

etc.

Also, I come to know about various credit rating agencies, their process of rating,

various grades of rating, various parameters etc. For the first time, I get to know that

bonds are rated during their time of issue.

Also, for the first time, I get to know that Investment banking firms functioning as an

agent. Earlier, my knowledge level regarding them was limited only to that they act as an

underwriter in a public issue. But, as an agent was a new learning for me.

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Most Importantly, the project help me to know how a Financial Concern manage is

Assets, how it invest them, i.e., how it gives credit, and what are the parameters that it

evaluates while searching for a suitable investment opportunity.

Finally, the project has increase my knowledge base by knowing how a Financial

Concern manage its Assets as that is the field I will be looking forward to work at after

finishing my MBA Programme.

RECOMMENDATIONS

1) An upper limit should be fixed for Life Insurance Companies in terms of amount

to be spend in by them in the PP market, so that, new potential investor can enter

the market and invest in securities.

2) A Diversified bond (containing % of both Equity and Bond) should also be

traded in the PP market so that investors can diversify their investment, like in

case of Mutual Funds.

3) The rating agencies should try to include more parameters on the basis of which

it ranks the companies. For example, what is the employee’s perception about

their company, Company policy towards its employees, outsiders, and society

among other things?

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 4) Investment banking Firms should play a more efficient role in maintaining good

understanding and close relationship between both the parties.

LIMITATIONS

No project report can be complete in itself. Each has its own set of limitations and

disadvantages.

Although, every effort has been made to make this report a complete one, but, few

limitations tends to happen.

The limitations of this project can be summed up as below:

1) The project report is a part of the Asset Management. It does not contain the

whole process as how a financial company manages its Assets. Instead, it

focuses just on Credit Research Process.

2) The project focus is only on the bonds issue in the Private Placement Market.

It does not focus on most important investment designation – Investing in

Equity.

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3) Too much focus has been put on U.S. Corporate Bonds. But, other types of

bonds have received little or no focus at all.

4) How does Investment Banking Firms find out potential investors for the

borrowing company is not mentioned?

5) Only big multinationals with good financial condition may be able to get good

ratings. Medium and small concerns may not be able to get high ratings and as

such, may not be able to raise the required source of finance.

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 BIBILIOGRAPHY

I. BOOKS:

 FINANCIAL MANAGEMENT – BY J.M. C. VANHORNE.(2001)

 INVESTMENT MANAGEMENT AND ANALYSIS - BY

FRANCIS.(2002)

 INVESTMENT MANAGEMENT – BY V.K. BHALLA(2003)

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II. WEBSITES:

www.investorwords.com

www.investinginbonds.com

www.bondsonline.com

www.investopedia.com

www.forbes/bonds/

www.finance.yahoo.com

www.jpmorgan.com/pages/jpmorgan/research/credit

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III. MAGAZINES:

 BOSTON CONSUTLING GROUP – ASSET MANAGEMENT.

 FINANCIAL REVIEW.

 HARVARD BUSINESS REVIEW.

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