Qualitative Factors: The Human Side of Corporate Bond Evaluation

As professionals working in the field of finance, there is an inherent inclination to gravitate towards quantitative metrics. The investment landscape is heavily influenced by quantitative methodologies focused on trend identification and the detection of potential risks. Still, it’s important not to overlook the value of qualitative factors of company analysis and bond research. It would be remiss to disregard the profound expertise accumulated by seasoned credit analysts over decades, living through challenging periods that can’t be explained by numbers alone.

Before we go any further, let’s identify the stark differences between qualitative and quantitative data.

• Qualitative data: Unstructured, descriptive and subjective
• Quantitative data: Structured, measurable and objective

It is fair to say that these two types of data (analysis) are at the opposite ends of the research spectrum. This brings us to the very different approaches:-

• Qualitative data: Why, how, when and in what context
• Quantitative data: How much, how many, and how often

Looking further in depth at these different analytical methods, they are applied in various ways:-

• Qualitative data: Assessing factors such as company culture, management effectiveness and business strategies
• Quantitative data: Financial analysis, market research and performance metrics

This then prompts the question, how effective is qualitative data in the research and analysis of corporate bonds?

There are many different ways in which qualitative data can be used to arrive at a corporate bond research recommendation. These include:-

Quality of the management

Unambiguous, factual data might show you how well the company has done in the past, but it won’t necessarily give the complete picture of the quality of management. As we know, there is an inherent link between management credibility, bond spreads, and the ability to raise funds. This is where adjusted financials also come into play, as because of the unregulated nature of these adjustments, they can deflect or even hide issues of possible concern.

Industry and market position

Market leadership is critical to any company and will significantly impact demand for corporate bonds and the relative cost of finance. Securing market leadership is a formidable challenge, yet sustaining such a position requires exceptional managerial prowess. One example would be Apple. Having built up a valuable brand, the company keeps innovating and leaving clients wanting more, which is all down to management.

Corporate governance and ethics

Beyond the reputational risks associated with negative press on corporate governance and ethics, these elements are the bedrock upon which a company’s long-term viability is established. The ESG revolution has had a couple of false dawns, but regulators are now squarely behind the concept. In the future, it will impact sources of funding and government contracts and may even limit the type of investments fund managers can consider. It would be unwise to disregard this!

Qualitative analysis is important in its own right, as is quantitative analysis, but when you combine the two; they incorporate the best of statistical data and practical analysis. As a corporate bond research company, we work in a framework that integrates both qualitative and quantitative data into our output. It’s critical that we maximize the skills and experience of our research team, using their expertise in assessing financial data while overlapping this with fundamental analysis of the company and management.

The continued influence of AI and machine learning means financial analysis is becoming more of a level playing field. However, this can still be influenced by the data that you recognize and any external pressure to support a preferred scenario. For example, we prefer to work with actual financials rather than adjusted figures, which tend to give the “real” scenario. That’s not to suggest we aren’t open to adjusting the figures ourselves, but we prefer to take a bottom-up approach to financial analysis.

Integrating quantitative and qualitative factors of company analysis gives a much broader, more in-depth picture of a company’s current financials and future prospects. These factors are integral to not only the ability to raise funds but also at what level and at what rate. Ultimately, year-end financial data offers merely a snapshot in time, whereas the true differentiator lies in discerning the company’s intricate dynamics and strategic trajectory.