Risk & returns
Credit risk is the possibility that a borrower or counterparty fails to make promised payments in full and on time. Loss also depends on exposure and recovery after default.
Make it click
Two IOUs promise the same amount, but one borrower has stable income and assets while the other is stretched. The written payment is identical; its reliability is not.
Now put that into markets
Bond yields and loan terms compensate for expected loss, uncertainty and liquidity. Ratings summarise opinions, not guarantees.
Expected credit loss combines default probability, exposure and loss given default. Spreads can widen before actual default.
Review cash generation, leverage, maturity, seniority, collateral, covenants and industry conditions. Compare market spread with the specific claim.
Low historic defaults can encourage complacency and recoveries vary. Sovereign, bank and corporate credit require different lenses.
Takeaway
