Start here Ratings sheet

Inputs for synthetic rating estimation

Please read the special cases worksheet (see below) before you use this spreadsheet.
Before you use this spreadsheet, make sure that the iteration box (under calculation options in excel) is checked.
Enter the type of firm = 2 (Enter 1 if large manufacturing firm, 2 if smaller or riskier firm, 3 if Small: <$5 billion
Do you have any operating lease or rental commitments? Yes Yes or No
Enter current Earnings before interest and taxes (EBIT) = 50 (Add back only long term interest expense for financial f
Enter current interest expenses = 8 (Use only long term interest expense for financial firms)
Enter current long term government bond rate = 5.10%
Output
Interest coverage ratio = 2.97
Estimated Bond Rating = B1/B+ Note: If you get REF! All over the place, set the operating lease comm
Estimated Default Spread = 3.51% to No, and then reset it to Yes. It should work.
Estimated Cost of Debt = 8.61%

If you want to update the spreads listed below, please visit http://www.bondsonline.com
For large manufacturing firms For financial service firms (default spreads are slighty different)
If interest coverage ratio is If long term interest coverage ratio is
> ≤ to Rating is Spread is greater than ≤ to Rating is Spread is
-100000 0.199999 D2/D 15.12% -100000 0.049999 D2/D 15.12%
0.2 0.649999 C2/C 11.34% 0.05 0.099999 C2/C 11.34%
0.65 0.799999 Ca2/CC 8.64% 0.1 0.199999 Ca2/CC 8.64%
0.8 1.249999 Caa/CCC 8.20% 0.2 0.299999 Caa/CCC 8.20%
1.25 1.499999 B3/B- 5.15% 0.3 0.399999 B3/B- 5.15%
1.5 1.749999 B2/B 4.21% 0.4 0.499999 B2/B 4.21%
1.75 1.999999 B1/B+ 3.51% 0.5 0.599999 B1/B+ 3.51%
2 2.2499999 Ba2/BB 2.40% 0.6 0.749999 Ba2/BB 2.40%
2.25 2.49999 Ba1/BB+ 2.00% 0.75 0.899999 Ba1/BB+ 2.00%
2.5 2.999999 Baa2/BBB 1.56% 0.9 1.199999 Baa2/BBB 1.56%
3 4.249999 A3/A- 1.22% 1.2 1.49999 A3/A- 1.22%
4.25 5.499999 A2/A 1.08% 1.5 1.99999 A2/A 1.08%
5.5 6.499999 A1/A+ 0.98% 2 2.49999 A1/A+ 0.98%
6.5 8.499999 Aa2/AA 0.78% 2.5 2.99999 Aa2/AA 0.78%
8.50 100000 Aaa/AAA 0.63% 3 100000 Aaa/AAA 0.63%

For smaller and riskier firms

If interest coverage ratio is
greater than ≤ to Rating is Spread is
-100000 0.499999 D2/D 15.12%
0.5 0.799999 C2/C 11.34%
0.8 1.249999 Ca2/CC 8.64%
1.25 1.499999 Caa/CCC 8.20%
1.5 1.999999 B3/B- 5.15%
2 2.499999 B2/B 4.21%
2.5 2.999999 B1/B+ 3.51%

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 Start here Ratings sheet

3 3.499999 Ba2/BB 2.40%

3.5 3.9999999 Ba1/BB+ 2.00%
4 4.499999 Baa2/BBB 1.56%
4.5 5.999999 A3/A- 1.22%
6 7.499999 A2/A 1.08%
7.5 9.499999 A1/A+ 0.98%
9.5 12.499999 Aa2/AA 0.78%
12.5 100000 Aaa/AAA 0.63%

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 Start here Ratings sheet

Yes 1
eadsheet. No 2
ns in excel) is checked. 3
Small: <$5 billion

nterest expense for financial firms)

t expense for financial firms)

set the operating lease commitment question in cell F5

eads are slighty different)

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 Operating Leases

Operating lease inputs

Operating lease expense in current year = $ 25.00
Operating Lease Commitments (From footnote to financials)
Year Commitment ! Year 1 is next year, ….
1 $ 24.00
2 $ 22.00
3 $ 22.00
4 $ 21.00
5 $ 20.00
6 and beyond $ 111.00

Pre-tax Cost of Debt = 8.61% ! If you do not have a cost of debt, use the attached ratings estimator

From the current financial statements, enter the following

Reported Operating Income (EBIT) = $ 50.00 ! This is the EBIT reported in the current income statement
Reported Debt = $ 92.97 ! This is the interest-bearing debt reported on the balance sheet
Reported Interest Expenses = $ 8.00
Output
Number of years embedded in yr 6 estima 5 ! I use the average lease expense over the first five years
to estimate the number of years of expenses in yr 6
Converting Operating Leases into debt
Year Commitment Present Value
1 $ 24.00 $ 22.10
2 $ 22.00 $ 18.65
3 $ 22.00 $ 17.17
4 $ 21.00 $ 15.09
5 $ 20.00 $ 13.23
6 and beyond $ 22.20 $ 57.72 ! Commitment beyond year 6 converted into an annuity for ten years
Debt Value of leases = $ 143.96

Restated Financials
Operating Income with Operating leases reclassified as debt = $ 60.60
Debt with Operating leases reclassified as debt = $ 236.93

Full Operating lease adjustment

Reported Operating income = $50.00
+ Current year's operating lease expense $25.00
- Depreciation on leased asset = $14.40
Adjusted Operating Income $60.60

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