Identifying Probability of Default for Alpha Industries Bond

Hard Credit Analysis And Valuation Credit Risk Measurement

As the Chief Credit Analyst at a fixed income investment firm, you are tasked with evaluating the credit risk of a mid-sized manufacturing company, Alpha Industries. Over the past five years, Alpha's EBIT has been volatile but has shown an upward trend. The company's business model relies heavily on a few key customers, which increases its dependency risk.

Alpha has recently issued a new bond with a 5-year maturity, offering a coupon rate of 6%. To understand the credit risk associated with this bond, you decide to consider Alpha's current financial ratios. The following ratios are relevant to your analysis:

Debt-to-Equity Ratio: 1.5
Interest Coverage Ratio (EBIT/Interest Expense): 2.0
Current Ratio: 1.1

Based on this information and considering the factors that determine credit risk, particularly quantitative metrics, you are tasked with identifying which of the following measures best captures the probability of default (PD) associated with Alpha’s bond issuance.

The Debt-to-Equity Ratio, which indicates leverage and financial risk.

The Interest Coverage Ratio, which indicates the company's ability to meet interest payments.

The Current Ratio, which indicates short-term liquidity.

Hint

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