medium · Corporate Credit Analysis

In the context of the credit cycle, why does the 'Expansion' phase typically lead to higher credit risk in the future?

1. Interest rates are always at their peak during an expansion, making debt service impossible.
2. Rating agencies become overly conservative during expansions, preventing firms from borrowing.
3. The expansion phase forces all companies to pay down their debt too quickly, reducing liquidity.
4. Rising risk appetite leads to weaker covenant terms and lower quality for the marginal borrower.

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