Explain how the nature of the markets a company sells into bears on its creditworthiness
The idea
A company's credit quality depends heavily on the markets it sells into. Stable, predictable demand, pricing power, high barriers to entry, differentiated products and low sensitivity to the business cycle all support steady cash flow and so lower default risk. Firms in fragmented, competitive markets selling commodity-like products, with volatile demand, high fixed costs and weak pricing power, have more volatile cash flow and weaker credit at the same leverage. Analysts therefore ask how a downturn or a new competitor would affect revenue and margins, not only what current coverage ratios show. The trap is ranking issuers on today's leverage alone: a cyclical producer with modest debt can be a worse credit than a utility-like business carrying more debt.
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