With the ability to survey the entire capital structure, credit investors use HOLT to test a wide range of scenarios, evaluate equity market expectations, and make investment decisions with more confidence. HOLT provides credit investors with a clean measurement of cash flow and profitability as well as a more holistic view of leverage, including off-balance sheet financing, liabilities and under-funded pension debt.
Using equity market expectations to identify excessive credit risk
A bond investor, worried by signals from the equities markets, sensed his portfolio had started to carry excessive risk. But he wasn’t sure which of his holdings were most vulnerable.
With HOLT’s forward-looking credit metrics, we were able to tell the client which companies were most likely to experience deteriorating credit fundamentals. Furthermore, we were able to identify which of these companies was the object of bearish equity market sentiment, further indicating likely credit quality deterioration. The credit metrics eventually deteriorated over the subsequent months as implied by the equity market.
By utilizing the equity market expectations our client was able to reduce exposure in the risky bonds prior their decline in value.
Helping a client look deep inside a company to value one of its units as a stand-alone entity
A large industrial company's principal manufacturing business was struggling. The performance of its financing arm was quite strong, however. Both equity and fixed income investors were seeking to quantify the value locked within the finance company.
HOLT was able to analyze and value the finance subsidiary as a stand-alone entity under various assumptions, leveraging our global benchmarking capabilities.
Our analysis gave investors a framework to better understand the profitability and enterprise value of both entities independently, suggesting that one's credit spreads had widened too much relative to the other's. This highlighted a profitable trading opportunity.
Analyzing margins to demonstrate to a client the resilience of an alternative business model
For a client specializing in distressed securities, we analyzed and valued a large-cap technology company. We determined that recent improvements in returns had been driven by higher operating margins. Peer companies had pursued the opposite strategy of much lower margins offset by higher asset efficiency.
We concluded that the major risk to the story was a threat to margins posed by low- margin, high-turn competitors. With the HOLT Framework providing insight into the level of EBITDA margins implied in the current enterprise valuation, we were able to quickly perform sensitivities on levels of margins that began to threaten liquidity.
The results of the analysis showed the cushion was sufficient, supporting the valuation of the bonds.
If you’re an investor in credit or an analyst and you’d like to learn more, please contact us.