## Calculation of Key Financial Statistics and Ratios

In this section, we outline the calculation of key financial statistics, ratios, and other metrics in accordance with the financial profile framework introduced in Step I.

■ Size (Market Valuation: equity value and enterprise value; and Key Financial Data: sales, gross profit, EBITDA, EBIT, and net income)

■ Profitability (gross profit, EBITDA, EBIT, and net income margins)

■ Growth Profile (historical and estimated growth rates)

■ Return on Investment (ROIC, ROE, ROA, and dividend yield)

■ Credit Profile (leverage ratios, coverage ratios, and credit ratings)

Size: Market Valuation

Equity Value Equity value ("market capitalization") is the value represented by a given company's basic shares outstanding plus "in-the-money" stock options,29 warrants,30 and convertible securities—collectively, "fully diluted shares outstanding." It is calculated by multiplying a company's current share price31 by its fully diluted shares outstanding (see Exhibit 1.6).

28This template should be adjusted as appropriate in accordance with the specific company/sector (see Exhibit 1.33).

29Stock options are granted to employees as a form of non-cash compensation. They provide the right to buy (call) shares of the company's common stock at a set price ("exercise" or "strike" price) during a given time period. Employee stock options are subject to vesting periods that restrict the number of shares available for exercise according to a set schedule. They become eligible to be converted into shares of common stock once their vesting period expires ("exercisable"). An option is considered "in-the-money" when the underlying company's share price surpasses the option's exercise price.

30A warrant is a security typically issued in conjunction with a debt instrument that entitles the purchaser of that instrument to buy shares of the issuer's common stock at a set price during a given time period. In this context, warrants serve to entice investor interest (usually as a detachable equity "sweetener") in riskier classes of securities such as non-investment grade bonds and mezzanine debt, by providing an increase to the security's overall return.

31For trading comps, the banker typically uses the company's share price as of the prior day's close as the basis for calculating equity value and trading multiples.

EXHIBIT 1.6 Calculation of Equity Value

Equity Value

Share Price x x

Basic Shares Outstanding

"In-the-Money" Options and Warrants

"In-the-Money" Convertible Securities

When compared to other companies, equity value only provides a measure of relative size. Therefore, for insight on absolute and relative market performance—which is informative for interpreting multiples and framing valuation—the banker looks at the company's current share price as a percentage of its 52-week high. This is a widely used metric that provides perspective on valuation and gauges current market sentiment and outlook for both the individual company and its broader sector. If a given company's percentage is significantly out of line with that of its peers, it is generally an indicator of company-specific (as opposed to sector-specific) issues. For example, a company may have missed its earnings guidance or underperformed versus its peers over the recent quarter(s). It may also be a sign of more entrenched issues involving management, operations, or specific markets.

Calculation of Fully Diluted Shares Outstanding A company's fully diluted shares are calculated by adding the number of shares represented by its in-the-money options, warrants, and convertibles securities to its basic shares outstanding.32 A company's most recent basic shares outstanding count is typically sourced from the first page of its 10-K or 10-Q (whichever is most recent). In some cases, however, the latest proxy statement may contain more updated data and, therefore, should be used in lieu of the 10-K or 10-Q. The most recent stock options/warrants information is obtained from a company's latest 10-K or, in some cases, the 10-Q.

The incremental shares represented by a company's in-the-money options and warrants are calculated in accordance with the treasury stock method (TSM). Those shares implied by a company's in-the-money convertible and equity-linked securities are calculated in accordance with the if-converted method or net share settlement (NSS), as appropriate.

Options and Warrants—The Treasury Stock Method The TSM assumes that all tranches of in-the-money options and warrants are exercised at their weighted average strike price with the resulting option proceeds used to repurchase outstanding

32Investment banks and finance professionals may differ as to whether they use "outstanding" or "exercisable" in-the-money options and warrants in the calculation of fully diluted shares outstanding when performing trading comps. For conservatism (i.e., assuming the most dilutive scenario), many firms employ all outstanding in-the-money options and warrants as opposed to just exercisable as they represent future claims against the company.

shares of stock at the company's current share price. In-the-money options and warrants are those that have an exercise price lower than the current market price of the underlying company's stock. As the strike price is lower than the current market price, the number of shares repurchased is less than the additional shares outstanding from exercised options. This results in a net issuance of shares, which is dilutive.

In Exhibit 1.7 we provide an example of how to calculate fully diluted shares outstanding using the TSM.

EXHIBIT 1.7 Calculation of Fully Diluted Shares Outstanding Using the Treasury Stock Method

(\$ in millions, except per share data; shares in millions)

 Current Share Price \$20.00 Basic Shares Outstanding 100.0 In-the-Money Options 5.0 Weighted Average Exercise Price \$18.00

As shown in Exhibit 1.7, the 5 million options are in-the-money as the exercise price of \$18.00 is lower than the current share price of \$20.00. This means that the holders of the options have the right to buy the company's shares at \$18.00 and sell them at \$20.00, thereby realizing the \$2.00 differential. Under the TSM, it is assumed that the \$18.00 of potential proceeds received by the company is used to repurchase shares that are currently trading at \$20.00. Therefore, the number of shares repurchased is 90% (\$18.00 / \$20.00) of the options, or 4.5 million shares in total (90% x 5 million). To calculate net new shares, the 4.5 million shares repurchased are subtracted from options of 5 million, resulting in 0.5 million. These new shares are added to the company's basic shares outstanding to derive fully diluted shares of 100.5 million.

Convertible and Equity-Linked Securities Outstanding convertible and equity-linked securities also need to be factored into the calculation of fully diluted shares outstanding. Convertible and equity-linked securities bridge the gap between traditional debt and equity, featuring characteristics of both. They include a broad range of instruments, such as traditional cash-pay convertible bonds, convertible hybrids, perpetual convertible preferred, and mandatory convertibles.33

33While the overall volume of issuance for convertible and equity-linked securities is less than that for straight debt instruments, they are relatively common in certain sectors.

This section focuses on the traditional cash-pay convertible bond as it is the most "plain-vanilla" structure. A cash-pay convertible bond ("convert") represents a straight debt instrument and an embedded equity call option that provides for the convert to be exchanged into a defined number of shares of the issuer's common stock under certain circumstances. The value of the embedded call option allows the issuer to pay a lower coupon than a straight debt instrument of the same credit. The strike price of the call option ("conversion price"), which represents the share price at which equity would be issued to bondholders if the bonds were converted, is typically set at a premium to the company's underlying share price at the time of issuance.

For the purposes of performing trading comps, to calculate fully diluted shares outstanding, it is standard practice to first determine whether the company's outstanding converts are in-the-money, meaning that the current share price is above the conversion price. In-the-money cash-pay converts are converted into additional shares in accordance with either the if-converted method or net share settlement, as applicable. Out-of-the-money converts, by contrast, remain treated as debt. Proper treatment of converts requires a careful reading of the relevant footnotes in the company's 10-K or prospectus for the security.

If-Converted Method In accordance with the if-converted method, when performing trading comps, in-the-money converts are converted into additional shares by dividing the convert's amount outstanding by its conversion price.34 Once converted, the convert is treated as equity and included in the calculation of the company's equity value. The equity value represented by the convert is calculated by multiplying the new shares outstanding from conversion by the company's current share price. Accordingly, the convert must be excluded from the calculation of the company's total debt.

As shown in Exhibit 1.8, as the company's current share price of \$20.00 is greater than the conversion price of \$15.00, we determine that the \$150 million convert is in-the-money. Therefore the convert's amount outstanding is simply divided by the conversion price to calculate new shares of 10 million (\$150 million / \$15.00). The new shares from conversion are then added to the company's basic shares outstanding of 100 million and net new shares from in-the-money options of 0.5 million to calculate fully diluted shares outstanding of 110.5 million.

The conversion of in-the-money converts also requires an upward adjustment to the company's net income to account for the foregone interest expense payments associated with the coupon on the convert. This amount must be tax-effected before being added back to net income. Therefore, while conversion is typically EPS dilutive due to the additional share issuance, net income is actually higher on a pro forma basis.

34For GAAP reporting purposes (e.g., for EPS and fully diluted shares outstanding), the if-converted method requires issuers to measure the dilutive impact of the security through a two-test process. First, the issuer needs to test the security as if it were debt on its balance sheet, with the stated interest expense reflected in net income and the underlying shares omitted from the share count. Second, the issuer needs to test the security as if it were converted into equity, which involves excluding the interest expense from the convert in net income and including the full underlying shares in the share count. Upon completion of the two tests, the issuer is required to use the more dilutive of the two methodologies.

EXHIBIT 1.8 Calculation of Fully Diluted Shares Outstanding Using the If-Converted Method

(\$ in millions, except per share data; shares in millions)

Assumptions

Stock

Current Share Price

\$2G.GG

Basic Shares Outstanding

1GG.G

Convertible

Amount Outstanding

\$15G.G

Conversion Price

= Amount Outstanding / Conversion Price = \$150.0 million / \$15.0

Calculated in Exhibit 1.71

= New Shares from Conversion + Net New Shares from Options + Basic Shares Outstanding = 10.0 million + 0.5 million + 100.0 million

Net Share Settlement For converts issued with a net share settlement accounting feature,35 the issuer is permitted to satisfy the face (or accreted) value of an in-the-money convert with cash upon conversion. Only the value represented by the excess of the current share price over the conversion price is assumed to be settled with the issuance of additional shares,36 which results in less share issuance. This serves to limit the dilutive effects of conversion by affording the issuer TSM accounting treatment.

As shown in Exhibit 1.9, the if-converted method results in incremental shares of 10 million shares, while NSS results in incremental shares of only 2.5 million. The NSS calculation is conducted by first multiplying the number of underlying shares in the convert of 10 million by the company's current share price of \$20.00 to determine the implied conversion value of \$200 million. The \$50 million spread between the conversion value and par (\$200 million — \$150 million) is then divided by the current share price to determine the number of incremental shares from conversion of 2.5 million (\$50 million / \$20.00).37 The \$150 million face value of the convert

35Effective for fiscal years beginning after December 15, 2008, the Financial Accounting Standards Board (FASB) put into effect new guidelines for NSS accounting. These changes effectively bifurcate an NSS convert into its debt and equity components, resulting in higher reported interest expense due to the higher imputed cost of debt. However, the new guidelines do not change the calculation of shares outstanding in accordance with the TSM. Therefore, one should consult with a capital markets specialist for accounting guidance on in-the-money converts with NSS features.

36The NSS feature may also be structured so that the issuer can elect to settle the excess conversion value in cash.

37As the company's share price increases, the amount of incremental shares issued also increases as the spread between conversion and par value widens.

If-Converted

Amount Outstanding / Conversion Price

Incremental Shares Plus: Basic Shares Outstanding Plus: Net New Shares from Options Fully Diluted Shares Outstanding

110.5

110.5

remains treated as debt due to the fact that the issuer typically has the right to settle this amount in cash.

EXHIBIT 1.9 Incremental Shares from If-Converted Versus Net Share Settlement

(\$ in millions, except per share data; shares in millions)

If-Converted

Amount Outstanding / Conversion Price Incremental Shares

Incremental Shares - If-Converted

10.0

Net Share Settlement

Amount Outstanding \$150.0

/ Conversion Price \$15.00

Incremental Shares 10.0^

x Current Share Price \$20.00

Total Value of Convert \$200.01 Less: Par Value of Amount Outstanding (150.0) 1

Excess Over Par Value \$50.01

/ Current Share Price \$20.00

Incremental Shares - NSS 2.5"1

: Excess Over Par Value / Current Share Price ■ \$50.0 million / \$20.00

: Total Value of Convert - Par Value of Amt. Out. ■ \$200.0 million - \$150.0 million

: Incremental Shares x Current Share Price ^ 10.0 million x \$20.00

= Amount Outstanding / Conversion Price = \$150.0 million / \$15.00

Enterprise Value Enterprise value ("total enterprise value" or "firm value") is the sum of all ownership interests in a company and claims on its assets from both debt and equity holders. As the graphic in Exhibit 1.10 depicts, it is defined as equity value + total debt + preferred stock + noncontrolling interest38 - cash and cash equivalents. The equity value component is calculated on a fully diluted basis.

EXHIBIT 1.10 Calculation of Enterprise Value

Enterprise Value

Equity Value

Total Debt

Preferred Stock

Noncontrolling Interest

Cash and Cash Equivalents

Theoretically, enterprise value is considered independent of capital structure, meaning that changes in a company's capital structure do not affect its enterprise value. For example, if a company raises additional debt that is held on the balance sheet as cash, its enterprise value remains constant as the new debt is offset by the increase in cash (i.e., net debt remains the same, see Scenario I in Exhibit 1.11).

38Formerly known as "minority interest," noncontrolling interest is a significant, but non-majority, interest (less than 50%) in a company's voting stock by another company or an investor. Effective for fiscal years beginning after December 15, 2008, FAS 160 changed the accounting and reporting for minority interest, which is now called noncontrolling interest and can be found in the shareholders' equity section of a company's balance sheet. On the income statement, the noncontrolling interest holder's share of income is subtracted from net income.

Similarly, if a company issues equity and uses the proceeds to repay debt, the incremental equity value is offset by the decrease in debt on a dollar-for-dollar basis (see Scenario II in Exhibit 1.11).39 Therefore, these transactions are enterprise value neutral.

EXHIBIT 1.11 Effects of Capital Structure Changes on Enterprise Value (\$ in millions)

Scenario I: Issuance of Debt

Actual 2007

Equity Value Plus: Total Debt Plus: Preferred Stock Plus: Noncontrolling Interest

100.0

Pro forma 2007

Equity Value Plus: Total Debt Plus: Preferred Stock Plus: Noncontrolling Interest

 Enterprise Value \$1,000.0 \$1,000.0 (\$ in millions) Scenario II : Issuance of Equity to Repay Debt Actual Adjustments 2007 + - Pro forma 2007

Equity Value Plus: Total Debt Plus: Preferred Stock Plus: Noncontrolling Interest Less: Cash and Cash Equivalents

100.0

Equity Value Plus: Total Debt Plus: Preferred Stock Plus: Noncontrolling Interest Less: Cash and Cash Equivalents

100.0

Enterprise Value

In both Scenario I and II, enterprise value remains constant despite a change in the company's capital structure. Hence, similar companies would be expected to have consistent enterprise value multiples despite differences in capital structure. One notable exception concerns highly leveraged companies, which may trade at a discount relative to their peers due to the perceived higher risk of financial distress40 and potential constraints to growth.

Size: Key Financial Data

Sales (or revenue) is the first line item, or "top line," on an income statement. Sales represents the total dollar amount realized by a company through the sale of its products and services during a given time period. Sales levels and trends are a key factor in determining a company's relative positioning among its peers. All else being equal, companies with greater sales volumes tend to

39These illustrative scenarios ignore financing fees associated with the debt and equity issuance as well as potential breakage costs associated with the repayment of debt. See Chapter 4: Leveraged Buyouts for additional information.

40 Circumstances whereby a company is unable or struggles to meet its credit obligations, typically resulting in business disruption, insolvency, or bankruptcy. As the perceived risk of financial distress increases, equity value generally decreases accordingly.

benefit from scale, market share, purchasing power, and lower risk profile, and are often rewarded by the market with a premium valuation relative to smaller peers.

■ Gross Profit, defined as sales less cost of goods sold (COGS),41 is the profit earned by a company after subtracting costs directly related to the production of its products and services. As such, it is a key indicator of operational efficiency and pricing power, and is usually expressed as a percentage of sales for analytical purposes (gross profit margin, see Exhibit 1.12). For example, if a company sells a product for \$100.00, and that product costs \$60.00 in materials, manufacturing, and direct labor to produce, then the gross profit on that product is \$40.00 and the gross profit margin is 40%.

■ EBITDA (earnings before interest, taxes, depreciation and amortization) is an important measure of profitability. As EBITDA is a non-GAAP financial measure and typically not reported by public filers, it is generally calculated by taking EBIT (or operating income/profit as often reported on the income statement) and adding back the depreciation and amortization (D&A) as sourced from the cash flow statement.42 EBITDA is a widely used proxy for operating cash flow as it reflects the company's total cash operating costs for producing its products and services. In addition, EBITDA serves as a fair "apples-to-apples" means of comparison among companies in the same sector because it is free from differences resulting from capital structure (i.e., interest expense) and tax regime (i.e., tax expense).

■ EBIT (earnings before interest and taxes) is often the same as reported operating income, operating profit, or income from operations43 on the income statement found in a company's SEC filings. Like EBITDA, EBIT is independent of tax regime and serves as a useful metric for comparing companies with different capital structures. It is, however, less indicative as a measure of operating cash flow than EBITDA because it includes non-cash D&A expense. Furthermore, D&A reflects discrepancies among different companies in capital spending and/or depreciation policy as well as acquisition histories (amortization).

■ Net income ("earnings" or the "bottom line") is the residual profit after all of a company's expenses have been netted out. Net income can also be viewed as the earnings available to equity holders once all of the company's obligations have been satisfied (e.g., to suppliers, vendors, service providers, employees, utilities, lessors, lenders, state and local treasuries). Wall Street tends to view net income on a per share basis (i.e., EPS).

41 COGS, as reported on the income statement, may include or exclude D&A depending on the filing company. If D&A is excluded, it is reported as a separate line item on the income statement.

42In the event a company reports D&A as a separate line item on the income statement (i.e., broken out separately from COGS and SG&A), EBITDA can be calculated as sales less COGS less SG&A.

43 EBIT may differ from operating income/profit due to the inclusion of income generated outside the scope of a company's ordinary course business operations ("other income").

### Profitability

■ Gross profit margin ("gross margin") measures the percentage of sales remaining after subtracting COGS (see Exhibit 1.12). It is driven by a company's direct cost per unit, such as materials, manufacturing, and direct labor involved in production. These costs are typically largely variable, as opposed to corporate overhead which is more fixed in nature.44 Companies ideally seek to increase their gross margin through a combination of improved sourcing/procurement of raw materials and enhanced pricing power, as well as by improving the efficiency of manufacturing facilities and processes.

EXHIBIT 1.12 Gross Profit Margin

Gross Profit Margin =

Gross Profit (Sales - COGS) Sales

■ EBITDA and EBIT margin are accepted standards for measuring a company's operating profitability (see Exhibit 1.13). Accordingly, they are used to frame relative performance both among peer companies and across sectors.

EXHIBIT 1.13 EBITDA and EBIT Margin

EBITDA Margin =

EBITDA Sales

EBIT Margin =

### EBIT Sales

■ Net income margin measures a company's overall profitability as opposed to its operating profitability (see Exhibit 1.14). It is net of interest expense and, therefore, affected by capital structure. As a result, companies with similar operating margins may have substantially different net income margins due to differences in leverage. Furthermore, as net income is impacted by taxes, companies with similar operating margins may have varying net income margins due to different tax rates.

EXHIBIT 1.14 Net Income Margin

Net Income Margin

### Net Income Sales

44 Variable costs change depending on the volume of goods produced and include items such as materials, direct labor, transportation, and utilities. Fixed costs remain more or less constant regardless of volume and include items such as lease expense, advertising and marketing, insurance, corporate overhead, and administrative salaries. These costs are usually captured in the SG&A (or equivalent) line item on the income statement.

### Growth Profile

A company's growth profile is a critical value driver. In assessing a company's growth profile, the banker typically looks at historical and estimated future growth rates as well as compound annual growth rates (CAGRs) for selected financial statistics (see Exhibit 1.15).

EXHIBIT 1.15 Historical and Estimated Diluted EPS Growth Rates

Fiscal Year Ending December 31

Diluted EPS % growth

Long-Term Growth Rate

150%

= (Ending Value / Beginning Value) A (1 / Ending Year - Beginning Year) - 1 = (\$1.30 / \$1.00) " (1 / (2007 - 2005)) - 1_

Source: Consensus Estimates

2005A

2006A

2007A

2008E

### 2009E

Historical annual EPS data is typically sourced directly from a company's 10-K or a financial information service that sources SEC filings. As with the calculation of any financial statistic, historical EPS must be adjusted for non-recurring items to be meaningful. The data that serves as the basis for a company's projected 1-year, 2-year, and long-term45 EPS growth rates is generally obtained from consensus estimates.

### Return on Investment

■ Return on invested capital (ROIC) measures the return generated by all capital provided to a company. As such, ROIC utilizes a pre-interest earnings statistic in the numerator, such as EBIT or tax-effected EBIT (also known as NOPAT or EBIAT) and a metric that captures both debt and equity in the denominator (see Exhibit 1.16). The denominator is typically calculated on an average basis (e.g., average of the balances as of the prior annual and most recent periods).

EXHIBIT 1.16 Return on Invested Capital

EBIT

Average Net Debt + Equity

■ Return on equity (ROE) measures the return generated on the equity provided to a company by its shareholders. As a result, ROE incorporates an earnings metric net of interest expense, such as net income, in the numerator and average shareholders' equity in the denominator (see Exhibit 1.17). ROE is an important indicator of performance as companies are intently focused on shareholder returns.

45 Represents a three-to-five-year estimate of annual EPS growth, as reported by equity research analysts.

EXHIBIT 1.17 Return on Equity

Net Income Average Shareholders' Equity

■ Return on assets (ROA) measures the return generated by a company's asset base, thereby providing a barometer of the asset efficiency of a business. ROA typically utilizes net income in the numerator and average total assets in the denominator (see Exhibit 1.18).

EXHIBIT 1.18 Return on Assets

Net Income Average Total Assets

■ Dividend yield is a measure of returns to shareholders, but from a different perspective than earnings-based ratios. Dividend yield measures the annual dividends per share paid by a company to its shareholders (which can be distributed either in cash or additional shares), expressed as a percentage of its share price. Dividends are typically paid on a quarterly basis and, therefore, must be annu-alized to calculate the implied dividend yield (see Exhibit 1.19).46 For example, if a company pays a quarterly dividend of \$0.05 per share (\$0.20 per share on an annualized basis) and its shares are currently trading at \$10.00, the dividend yield is 2% ((\$0.05 x 4 payments) / \$10.00).

EXHIBIT 1.19 Implied Dividend Yield

Implied Dividend Yield =

Most Recent Quarterly Dividend Per Share x 4 Current Share Price

### Credit Profile

Leverage Leverage refers to a company's debt level. It is typically measured as a multiple of EBITDA (e.g., debt-to-EBITDA) or as a percentage of total capitalization (e.g., debt-to-total capitalization). Both debt and equity investors closely track a company's leverage as it reveals a great deal about financial policy, risk profile, and capacity for growth. As a general rule, the higher a company's leverage, the higher its risk of financial distress due to the burden associated with greater interest expense and principal repayments.

46Not all companies choose to pay dividends to their shareholders.

■ Debt-to-EBITDA depicts the ratio of a company's debt to its EBITDA, with a higher multiple connoting higher leverage (see Exhibit 1.20). It is generally calculated on the basis of LTM financial statistics. There are several variations of this ratio, including total debt-to-EBITDA, senior secured debt-to-EBITDA, net debt-to-EBITDA, and total debt-to-(EBITDA less capex). As EBITDA is typically used as a rough proxy for operating cash flow, this ratio can be viewed as a measure of how many years of a company's cash flows are needed to repay its debt.

EXHIBIT 1.20 Leverage Ratio

Debt

EBITDA

■ Debt-to-total capitalization measures a company's debt as a percentage of its total capitalization (debt + preferred stock + noncontrolling interest + equity) (see Exhibit 1.21). This ratio can be calculated on the basis of book or market values depending on the situation. As with debt-to-EBITDA, a higher debt-to-total capitalization ratio connotes higher debt levels and risk of financial distress.

EXHIBIT 1.21 Capitalization Ratio

Debt-to-Total Capitalization =

Debt

Debt + Preferred Stock + Noncontrolling Interest + Equity

Coverage Coverage is a broad term that refers to a company's ability to meet ("cover") its interest expense obligations. Coverage ratios are generally comprised of a financial statistic representing operating cash flow (e.g., LTM EBITDA) in the numerator and LTM interest expense in the denominator. There are several variations of the coverage ratio, including EBITDA-to-interest expense, (EBITDA less capex)-to-interest expense, and EBIT-to-interest expense (see Exhibit 1.22). Intuitively, the higher the coverage ratio, the better positioned the company is to meet its debt obligations and, therefore, the stronger its credit profile.

EXHIBIT 1.22 Interest Coverage Ratio

Interest Coverage Ratio =

Interest Expense

Credit Ratings A credit rating is an assessment47 by an independent rating agency of a company's ability and willingness to make full and timely payments of amounts due on its debt obligations. Credit ratings are typically required for companies seeking to raise debt financing in the capital markets as only a limited class of investors will participate in a corporate debt offering without an assigned credit rating on the new

issue.

The three primary credit rating agencies are Moody's, S&P, and Fitch. Nearly every public debt issuer receives a rating from Moody's, S&P, and/or Fitch. Moody's uses an alphanumeric scale, while S&P and Fitch both use an alphabetic system combined with pluses (+) and minuses ( —) to rate the creditworthiness of an issuer. The ratings scales of the primary rating agencies are shown in Exhibit 1.23.

EXHIBIT 1.23 Ratings Scales of the Primary Rating Agencies

EXHIBIT 1.23 Ratings Scales of the Primary Rating Agencies