The capital structure of your loan • 11.10.09
The evaluation of a company’s future prospects of being a profitable business and the ability and willingness to improve the financial risk profile is a very important part in the investment decision process. The quality and experience of management is of particular interest because the compatibility of the business strategy with the financial profile of a company is fundamental for successful companies. Financial and nonfinancial factors like strategic management decisions (feasibility of the business plan) and the competitive environment set the parameters for the improvement of credit quality in the future. Management has always the option to surprise market participants with the announcement of unexpected company actions which will alter the capital structure. The change of a previously announced strategy is a major component of the event risk. It is impossible to quantify event risk for a company hence it is a subjective factor in the valuation process.
Typical examples are:
- Mergers and Acquisitions
- Share buyback programs
- Focus on new business segments
- Leveraged Buy-outs
- All actions which result in an increased leverage.
