at which firms in different ratings classes trade to get a
measureofthediscount(ifany)thatisbeingappliedbythe
marketforthedegreeofdistresstowhichafirmisexposed.If
thereareenoughfirmsinthesectorthatweareanalyzingin
eachratingsclass,wecoulddothisonasectorbasis.Ifthere
arenot,wecouldlookatthemultipleacrosstheentiremarket
and examine differences across bond rating classes.
ILLUSTRATION 17.6: Adjusted Multiple: Global Crossing
Lookingatalltelecomfirmsandcategorizingthembasedon
bond ratings, we were able to estimate the value-to-book
ratios at the end of 2001 by bond rating class:
Bond RatingValue-to-Book Capital Ratio
A 1.70
BBB 1.61
BB 1.18
B 1.06
CCC 0.88
CC 0.61
Thedifferencesbetween ratingsclasses provideuswithan
indicationofthediscountthatwewouldapplywhenvaluing
distressedfirms.Forinstance,GlobalCrossingwithitsCCC
ratingshouldhaveamultiple thatisroughlyhalfthatofa
healthy A rated firm in the same sector.
Considering the Possibility of Distress Explicitly
Oneoftheadaptationsthatwesuggestedfordiscountedcash
flowvaluationwasanexplicitassessmentofdefaultriskand