Use Case — Fundamental Credit Review

PM question

Two issuers are being screened for a new position: Issuer A ($200 debt, $10 interest expense) and Issuer B ($400 debt, $30 interest expense), both with $100 of EBITDA. Which is the stronger credit, and does the CDX index they'd sit in look cheap or rich right now?

Concepts

leverage ratio, interest coverage ratio, fixed-charge coverage ratio, credit index intrinsic spread and basis.

First exercise

Using pm.fixed_income.credit.leverage_ratio and interest_coverage_ratio:

1. compute leverage and interest coverage for both issuers
2. Issuer A also carries $15 of mandatory term-loan amortization this year — recompute its coverage picture with fixed_charge_coverage_ratio and compare to interest coverage alone
3. decide: is Issuer B automatically the weaker credit just because it's more leveraged, or does its coverage tell a more specific story?

Then, using index_intrinsic_spread and index_basis: five single-name CDS spreads (80, 90, 100, 70, 110 bp) trade equal-weighted under an index quoted at 95bp — is the index cheap or rich relative to its intrinsic value, and by how much?

Extend

The central bank raises rates sharply. Issuer A's debt is a fixed-rate bond; Issuer B's is a floating-rate term loan. Whose coverage ratio is directly affected by the rate move alone, and whose isn't? See reference/fixed_income/leveraged_loans.md.