Writing a credit view
Pull liquidity, leverage, leases and the business together into the one-page view a credit committee expects, on Macy's latest 10-K: business risk, financial risk, protections, and what would change the view.
FinanceReading the accounts like an analystAbout 9 min: 9 readingUpdated
General education, not financial advice.
- Structure a credit view around business risk, financial risk, liquidity and protections
- Combine ratios into a judgement about the capacity to repay and how it could change
- Write a one-page credit memo with a clear view and triggers
Builds toward: Judge a company. Read a company's accounts, apply Graham's tests, and make a rough valuation.
Reading the accounts like an analyst: lesson 14 of 14
- Reading the accounts like an analyst
- The three statements and how they link 10 min
- Common-size statements and trends 9 min
- Profitability ratios: margins, ROA and ROE 9 min
- Efficiency ratios and the cash conversion cycle 9 min
- DuPont analysis: where ROE comes from 10 min
- Reading the cash flow statement like an analyst 9 min
- Profit against cash: accruals and earnings quality 11 min
- When is a sale a sale? Revenue timing and channel stuffing 10 min
- The expense side: capitalised costs, reserves and big baths 8 min
- The Beneish M-score: a screen for manipulation, and its limits 10 min
- Liquidity: can they pay what's due this year? 9 min
- Solvency and cover: can they carry their debt? 8 min
- Leases and hidden debt 8 min
- Writing a credit view 9 min
Pairs with any financial statement analysis text (the chapter on credit analysis); rating agencies' published methodologies, used as a guide to structure only
Mission
This is an exercise in analysis on a real filing, not a recommendation to buy, sell or lend.
From: the chair of a fund's credit committee Due: Friday, one page
Macy's bonds are rated just below investment grade by two agencies and just above by a third. Before we decide whether they fit a fund that may hold only investment-grade bonds when we buy, give me your own credit view: how safe is the debt, what protects lenders, which way is it heading, and what would change your mind. Use the 10-K for the year to 31 January 2026 (filed 27 March 2026).
Use the 10-K itself; everything you need is in Items 2, 7 and 8. As a start, the 10-K reports ratings of Ba1 (Moody's), BB+ (S&P) and BBB− (Fitch), all with a stable outlook.
What it is
The toolkit for this job.
The structure of a credit view. Credit analysts, and the rating agencies whose public methods they borrow from, usually work through four questions:
- Business risk: how stable and defensible are the earnings? Size, market position, trend, cyclicality.
- Financial risk: how much debt against those earnings and assets? Leverage, cover, cash flow after investment and payouts.
- Liquidity and maturities: can it meet what's due in the next one to two years, and with what margin?
- Protections: security, covenants, assets that could be sold, and where these bonds rank.
Then the view, its direction (improving, stable, weakening) and the triggers that would change it.
Credit is about the downside. A shareholder benefits from growth; a lender gets its money back and no more. So a credit view asks what would have to go wrong for the debt not to be repaid, and how likely that is.
Ratings are opinions. The agencies' ratings are useful evidence and often decide who may hold a bond, but a credit view should stand on its own analysis and say where it agrees or differs.
Why it matters
Every earlier lesson in this module measures one thing. A credit committee needs one page that weighs them: the decision depends on the combination (a weak trend with strong protections, or the reverse). Writing that page, and being clear about what would change it, is the core skill of credit work.
Worked example
An imaginary regional grocer, Felling, in five lines:
- Business: sales flat for three years; strong local share; low cyclicality.
- Financial: debt 2.0× EBITDA, 3.0× including leases; interest cover 6×; free cash flow after dividends positive.
- Liquidity: cash covers the next two years' maturities.
- Protections: owns 40% of its stores, unencumbered.
- View: solid, stable; would weaken if a discounter entered its region and margins fell two points.
The view is short because the work behind each line is done.
Common mistake
Listing ratios without a view, or giving a view without saying what would change it. A credit committee needs to know what you think, why, and what to watch.
Key terms
- business risk
- the risk that a company's earnings fall because of its market, competition or cycle
- financial risk
- the risk that comes from how much the company has borrowed
- investment grade
- ratings of BBB− (S&P, Fitch) or Baa3 (Moody's) and above
- unencumbered assets
- assets not pledged to any lender
- springing covenant
- a covenant that applies only when a condition is met, such as low availability under a credit line
Practise the key terms
Tap a card to turn it over. 5 cards.
| Front | Back |
|---|---|
| business risk | the risk that a company's earnings fall because of its market, competition or cycle |
| financial risk | the risk that comes from how much the company has borrowed |
| investment grade | ratings of BBB− (S&P, Fitch) or Baa3 (Moody's) and above |
| unencumbered assets | assets not pledged to any lender |
| springing covenant | a covenant that applies only when a condition is met, such as low availability under a credit line |
Task
Write the one-page credit view for the committee, from the 10-K:
- Business risk.
- Financial risk.
- Liquidity and protections.
- Your view, its direction, how it compares with the three ratings, and what would change it.
Model answer
Show the model answer
The figures (from the consolidated statements and notes, Item 8; ratings and the EBITDA reconciliation from Item 7; property from Item 2):
- Revenue 23.9 billion (2023), 23.0 (2024), 22.6 (2025); operating income 301 million, 909 million, 1,030 million.
- 2025 operating income includes a 328 million gain from settling interchange-fee litigation (agreed in January 2026 and still in receivables at the year end, so not yet cash), 230 million of impairment, restructuring and other costs, and 48 million of gains on real-estate sales.
- The company's Adjusted EBITDA: 2,236 million (2023), 1,977 (2024), 1,842 (2025). Its unadjusted EBITDA for 2025 is 1,873 (net income plus tax, net interest, debt-extinguishment loss, and depreciation and amortisation).
- Interest on debt 160 million (net interest expense 97 million).
- Long-term debt 2,432 million; lease liabilities 3,135 million (operating 3,122, finance 13); cash 1,246 million.
- Operating cash flow 1,430 million; capital spending 373 million plus capitalised software 367 million; dividends 197 million; share buybacks 250 million; net debt repaid 346 million.
- 243 owned store locations "held free and clear of mortgages", plus 79 where Macy's owns the building on leased land.
- A 2.1 billion dollar asset-based credit facility to April 2030 (undrawn; 1,957 million of capacity after letters of credit), secured on a first-priority basis on the borrower's assets including inventory, which requires a fixed-charge cover of at least 1.00 to 1.00 if availability falls below a set level.
| Measure | 2025 |
|---|---|
| Debt ÷ Adjusted EBITDA | 1.3× |
| Lease-adjusted debt ÷ EBITDAR (1) | 2.5× |
| Underlying interest cover (2) | 5.9× |
| Free cash flow after capex and software | 690 |
| … after dividends and buybacks | 243 |
(1) (2,432 + 3,135) ÷ (1,842 + 361 operating lease cost) = 5,567 ÷ 2,203. (2) (Adjusted EBITDA 1,842 − depreciation 894) ÷ interest on debt 160.
Macy's: low leverage and strong asset protection, but earnings are shrinking underneath a one-off gain · Source: Form 10-K, year to 31 January 2026
View: a stable credit at the high end of the BB range today, with a weakening trend; consistent with the two agencies that rate it just below investment grade. Fitch's BBB− is one notch higher: the low leverage and asset protection would support that, the earnings trend argues against it.
Business risk is the weak side. Revenue has fallen two years running (about 5% since 2023), and the reported rise in operating income comes from a 328 million litigation settlement not yet received in cash: the company's own Adjusted EBITDA has fallen from 2.24 billion to 1.84 billion in two years.
Financial risk is moderate. Debt is 1.3× Adjusted EBITDA, 2.5× including leases; interest on debt is covered about 6×; free cash flow of about 0.7 billion covered dividends and buybacks with about 0.2 billion to spare, and net debt fell by 0.35 billion.
Protections are real. 243 owned stores are free of mortgages and the bonds aren't secured on them, giving lenders a large pool of unencumbered property. The credit facility is secured on inventory and ranks ahead of the bonds on that collateral; its cover test applies only if availability falls low.
What would change my view: Adjusted EBITDA falling below about 1.5 billion, which would take lease-adjusted leverage to about 3×; debt-funded buybacks; sales of owned property without debt repayment; or drawings on the credit facility outside the holiday season.
How the expert gets there. They write the four sections from the 10-K before looking at the ratings, then compare. They strip one-off items out of operating income first (the settlement, the charges, the property gains) and use the company's own reconciliation to check; note that its Adjusted EBITDA removes the settlement, the charges and 67 million of pension settlement charges, but still includes the 48 million of property gains (about 1,794 without them, which doesn't change the ratios to one decimal). They match lease-adjusted debt with EBITDAR, look at free cash flow after shareholder payouts (lenders are paid only after those), and read Item 2 for owned property, because unencumbered assets are what lenders fall back on. The view says which part is weak and which is strong, and the triggers follow from the weak part.
What a reviewer would flag:
- Repeating the ratings as the view.
- Using operating income that includes the 328 million interchange settlement, and calling profit "recovered".
- Ignoring capitalised software, which is real investment spending.
- Calling the property "security" when the bonds aren't secured on it.
- A view with no direction or triggers.
Practice
Transfer: a sportswear company. Nike's 10-K for the year to 31 May 2026 shows long-term debt of 7.9 billion dollars and cash and short-term investments of 9.0 billion: more cash than debt. A colleague says: "Net cash, so the credit is as strong as ever." Open the 10-K. In three sentences: do you agree, and what would change your mind?
A model answer
Still a strong credit, but weaker than the balance sheet suggests. Operating cash flow has fallen from 7.4 billion (2024) to 2.9 billion (2026); after 0.7 billion of capital spending, free cash flow of about 2.2 billion no longer covers the 2.4 billion of dividends, and buybacks have been cut from 4.25 billion (2024) to 0.15 billion (2026); 2.0 billion of debt falls due within a year, and there are 3.1 billion of operating lease liabilities on top of the 7.9 billion of debt. With 9.0 billion of cash and investments the debt is easily covered today, so the issue is direction, not danger. What would change my mind: operating cash flow recovering above dividends plus capital spending, or, the other way, the dividend being funded by debt or cash falling below the next two years' maturities.
How the expert gets there: net cash answers "can they repay today?"; the trend in cash flow against payouts answers "will that still be true?".
What a reviewer would flag: stopping at net cash; ignoring the 2.0 billion maturity.
In short
- A credit view covers business risk, financial risk, liquidity and protections.
- Credit is about the downside: what would have to go wrong for the debt not to be repaid?
- Use lease-adjusted leverage and free cash flow after payouts.
- Unencumbered assets and covenants matter to lenders; know which bonds they protect.
- Give a view, a direction and triggers; compare with ratings, don't copy them.
Check yourself
Answer in your head first, then open the answer. Nothing is saved.
Why does a lender care about free cash flow after dividends and buybacks?
Show answer
Because payouts to shareholders come out of the same cash that would otherwise repay or service debt.
What makes an asset "unencumbered", and why does it matter to unsecured lenders?
Show answer
It isn't pledged to any lender, so in a default it is available to creditors generally, including unsecured bondholders.
A company has net cash but its cash flow is falling and no longer covers its dividend. Is that a credit concern?
Show answer
Not an immediate danger, but a weakening trend: if it continues, cash will fall or debt will rise to fund payouts.
Further reading
- Macy's, Inc., Form 10-K for the year ended 31 January 2026 (Items 2, 7 and 8); NIKE, Inc., Form 10-K for the year ended 31 May 2026 (SEC EDGAR).
- S&P Global Ratings and Moody's publish their corporate rating methodologies free online; read one as a guide to structure.
- On this site: Leases and hidden debt.
Finished? Mark it done to fill in your leaf on the Finance map.