Synthetic rating
An estimated credit rating for an unrated issuer, from ratios such as interest coverage matched against those of rated companies. The matching spread over government yields gives a pre-tax cost of debt.
Where you will meet it
Synthetic rating appears in 2 learning outcomes on the CFA syllabus. A few of them:
- Contrast the approaches for estimating what debt costs a firm
“Where the issuer is unrated, a synthetic rating assigns a rating from ratios such as interest coverage, then adds the matching spread to a government yield.”
- Work out the cost of debt or equity investors' required return for both a listed and a privately held company
“Add size and company-specific premiums where justified, and estimate the cost of debt from a synthetic rating or bank rates.”
See also
Practise it
Practise synthetic rating until it is automatic: questions that explain every wrong option.
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