About Credit Investment 

Fixed income is generally considered as a relatively stable and dependable investment tool. Investing in the debt of companies, also called credit fixed income, can offer benefits. However, "credit" is a wide-ranging area. Before investing in this market, challenge yourself to see how much you know about credit investment by going thru the different levels of questions below : Level 1 > Level 2 > Level 3

When comparing credit to equity, equity has the lowest seniority in the payout order. To compensate for this additional risk, equity holders require a higher return on capital. Reflecting the higher risk, equity markets are relatively more volatile than credit market.

Various debt obligations can have different priority of payment corresponding to the seniority rankings. Senior secured debt top the ranking structure in the case of a default, with owners being paid off before other debtors.

What is a corporate credit rating?

A credit rating is an evaluation of the creditworthiness of a borrower with respect to a particular debt or financial obligation assigned by external rating agencies. Moody’s, Standard & Poor’s and Fitch Ratings are three top agencies deal in credit ratings. Each credit rating agency has defined its own credit rating, the ratings generally lie on a spectrum ranging from the highest credit quality AAA on one end to default on the other. BBB- is the lowest rating of investment grade, while ratings below BBB- are considered as high yield.

Credit spreads are a good barometer of credit market.

Widening credit spreads indicate growing concern about the ability of corporate to service their debt while corporate bond prices fall and yields rise. Conversely, narrowing credit spreads indicate improving private creditworthiness. Corporate bond prices rise and yields fall.

A number of factors affect credit spreads:

Idiosyncratic risk

Risk factors endemic to particular company or sector has an important impact on credit spreads over time. The impact could be mitigated by improving company fundamentals.

Economic growth

In economic expansion stage, earnings of most companies grow. This translates to a higher ability to repay debt, assuming debt levels stay constant. Default risk decreases, resulting in the narrowing of credit spreads. While the inverse happens in economic slowdown.

Economic cycle

Credit tends to perform in a more normalized framework during stages of stabilization and acceleration and could bear a higher default risk during stages of deceleration and slowdown.