Strategic Corporate Finance: Applications in Valuation and Capital Structure

INDUSTRY CONSIDERATIONS

With respect to industry considerations, leverage ratios vary widely between industries, even within the same ratings categories (similar results were obtained for FFO/debt as debt/EBITDA), due to differences in earnings quality, outlook, sustainability, and qualitative factors. But there is less dispersion among the stronger rating categories; industry factors decline in importance as credits are held to the same high standards, suggesting many participants may have more difficulty to achieve the strongest categories in some industries.

Utilities, repeat fee-based businesses such as cable TV and transaction processors, and to a lesser extent telecoms tend to carry more leveragability within the same rating versus general corporate industrials. Regulation reduces credit risk by lending more predictability and certainty to cash flows.

Technology and healthcare (excluding pharmaceuticals and biotech), exhibit the least debt capacity within each rating due to perceptions of greater technology and/or regulatory risk, cash flow volatility, shorter product lives, product liability, and less fixed asset intensity. Asset intensity generally provides support to a credit.

Consumer products credits are heavily influenced by numerous qualitative factors (franchise strength, bargaining position, brand, market share, and diversity of revenue) for which quantitative factors (ln of revenue) can serve as a proxy. Retail revenue tends to be accorded smaller size coefficients, ...