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CFA Level I · CFA Level I Exam · Credit Analysis for Corporate Issuers

In credit analysis of a corporate issuer, the four Cs are capacity, collateral, covenants and character. Which of these is most likely assessed by analyzing the issuer's ability to generate cash flow to service its debt?

Capacity is the C that addresses the issuer's ability to generate cash flow to service debt. It is assessed through cash flow, leverage, coverage and industry analysis. Collateral concerns pledged assets, and covenants are contractual terms, so neither measures the ability to generate the cash needed for payments.

  1. ACapacityCorrect
  2. BCovenants
  3. CCollateral

Explanation

Capacity is the borrower's ability to make its debt payments on time, judged from cash flow, profitability, leverage and industry position. Collateral concerns assets pledged as security, and covenants are contractual restrictions and requirements. Neither of these measures the ability to generate cash flow.

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