Credit migration and Gearing: Difference between pages

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''Borrowings - securities - bonds - credit ratings.''
'''1.''' <br />
<i>Financial gearing</i> measures the relative amount of debt in a firm's capital structure.<br />
Gearing is sometimes also known as <i>leverage</i>.


Credit migration is a change in a credit rating over time, either downward or upward.


Sometimes abbreviated to ''migration.''
Gearing and leverage ratios can be calculated in several different ways, so consistency of approach is important.




:<span style="color:#4B0082">'''''Credit migration more likely for lower-rated issues'''''</span>
Two essential bases to define are:


:"... as we move down the credit-rating spectrum, typically the probability of credit migration increases and with this, so too the probability of increased volatility.
i. The use of book or market values.<br />
ii. The use of Debt divided by Equity (D/E) or of Debt divided by Debt plus Equity = D / (D+E).


:This should be managed by having [only] small exposures to lower-quality credit and to individual lower-quality issuers."


:''Ultra Short Duration Bond Funds: The importance of credit - ACT Knowledge Hub.''
<span style="color:#4B0082">'''Example 1: Calculation of gearing'''</span>


<i>Gearing</i><br />
Assume the values of debt and equity are equal, say USD 1m each.<br />
D/E = 1/1 = 100%.<br />
This is usually known as 'gearing'.




== See also ==
<span style="color:#4B0082">'''Example 2: Calculation of leverage'''</span>
* [[Bond]]
* [[Corporate credit ratings: a quick guide]]
* [[Credit]]
* [[Credit migration risk]]
* [[Credit rating]]
* [[Credit risk]]
* [[Downgrade]]
* [[Duration]]
* [[Investment grade]]
* [[Issuer]]
* [[Maturity]]
* [[Ultra short duration bond fund]]  (USBF)
* [[Upgrade]]
* [[Volatility]]


<i>Leverage</i><br />
Using the other calculation with the same inputs (D = 1 and E = 1):<br />
D / (D+E) = 1/2 = 50%.<br />
This is usually known as 'leverage'.


==Other resource==
[https://hub.treasurers.org/ultra-short-duration-bond-funds-the-importance-of-credit/ Ultra Short Duration Bond Funds: The importance of credit - ACT Knowledge Hub]


[[Category:The_business_context]]
<b>Adjustments to D and E figures</b><br />
With respect to the Debt figure, practice varies in including or excluding certain items such as cash, short term borrowings, leases, pensions and other provisions.<br />
Practitioners may also adjust the Equity figure, for example to exclude intangible assets.
 
 
<b>Bank supervision</b><br />
In the banking context, the calculation of the regulatory [[Leverage Ratio]] is strictly specified, following [[Basel III]].
 
 
'''2.''' <br />
<i>Operational gearing</i> relates to the operating costs of a business, and measures the relative proportions of fixed and variable operating costs.
 
 
'''3.''' <br />
'Gearing up' refers to increasing the levels of financial or operation gearing - or both - within an organisation.<br />
The intention of gearing up is to improve expected net results.  <br />
A consequence of gearing up is normally to increase risk.
 
 
Many financial disasters have been a consequence of gearing up (or leveraging) excessively in this way in earlier periods.
 
 
==See also==
* [[Basel III]]
* [[Debt equity ratio]]
* [[Debt to equity ratio]]
* [[Geared beta]]
* [[Intangible assets]]
* [[Leverage]]
* [[Leverage Ratio]]
* [[Leveraged]]
* [[Leveraged takeover]]
* [[Levered]]
* [[MCT]]
* [[Off balance sheet finance]]
* [[Ungeared]]
* [[Ungeared cash flow]]
 
 
===Other links===
[http://www.treasurers.org/node/8012 Masterclass: Measuring financial risk, The Treasurer, July 2012]
 
[[Category:Corporate_finance]]
[[Category:Corporate_finance]]
[[Category:Investment]]
[[Category:Long_term_funding]]
[[Category:Cash_management]]
[[Category:Financial_products_and_markets]]
[[Category:Liquidity_management]]

Revision as of 13:16, 11 November 2016

1.
Financial gearing measures the relative amount of debt in a firm's capital structure.
Gearing is sometimes also known as leverage.


Gearing and leverage ratios can be calculated in several different ways, so consistency of approach is important.


Two essential bases to define are:

i. The use of book or market values.
ii. The use of Debt divided by Equity (D/E) or of Debt divided by Debt plus Equity = D / (D+E).


Example 1: Calculation of gearing

Gearing
Assume the values of debt and equity are equal, say USD 1m each.
D/E = 1/1 = 100%.
This is usually known as 'gearing'.


Example 2: Calculation of leverage

Leverage
Using the other calculation with the same inputs (D = 1 and E = 1):
D / (D+E) = 1/2 = 50%.
This is usually known as 'leverage'.


Adjustments to D and E figures
With respect to the Debt figure, practice varies in including or excluding certain items such as cash, short term borrowings, leases, pensions and other provisions.
Practitioners may also adjust the Equity figure, for example to exclude intangible assets.


Bank supervision
In the banking context, the calculation of the regulatory Leverage Ratio is strictly specified, following Basel III.


2.
Operational gearing relates to the operating costs of a business, and measures the relative proportions of fixed and variable operating costs.


3.
'Gearing up' refers to increasing the levels of financial or operation gearing - or both - within an organisation.
The intention of gearing up is to improve expected net results.
A consequence of gearing up is normally to increase risk.


Many financial disasters have been a consequence of gearing up (or leveraging) excessively in this way in earlier periods.


See also


Other links

Masterclass: Measuring financial risk, The Treasurer, July 2012

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