By Bankfachwirt (IHK) Moritz Jaeckle/ Partner
A rating may only consist of a number or one or more letters, but as a credit rating it can make or break a successful financing deal.
I have summarised in this blog why it is important to think about one’s rating and what possibilities there are for an effective rating rescue in a crisis.
The crisis is here
The scenario is familiar: there is a crisis in the company, what used to be a success crisis is slowly turning into a liquidity crisis, following the usual sequence of crisis stages in companies. At first, payment targets are fully utilised and overdrawn, credit lines are increasingly maxed out, direct debits are returned by the bank.
The role of the bank
It is often only at this stage that the company contacts its bank and other providers of finance and asks for an extension of its credit lines. The rude awakening often follows when the extension of credit lines or a new loan is not approved. When approval does come, the interest rates are much higher than expected and the company’s creditworthiness wobbles.
Creditworthiness plays the all-important role for financing partners when it comes to granting new loans or prolonging existing ones.
An assessment of creditworthiness is made with the help of an (external or internal) rating, which makes a statement about the probability of default of the borrower within one year.
Internal ratings are determined by credit institutions with the help of mathematical-statistical rating procedures and are the main criterion for loan conditions and the amount of financing – but also for the rejection of a loan application.
The internal rating is determined from “hard” financial figures (current and forecast) as well as “soft” criteria such as: company management, competitive positioning, industry, employee situation.
The creditworthiness and thus the internal ratings are subject to constant monitoring in the credit institutions in order to be able to recognise changes in the creditworthiness promptly.
In the following constellations, the borrower (and its liabilities) is considered to be in default, and a default rating is assigned:
- Unlikelihood of repayment: The credit institution considers it unlikely that the borrower will be able to meet its liabilities; indicators are, for example, insolvency or restructuring of liabilities due to a crisis.
- Overdue receivables (1% of the receivables volume overdue for more than 90 days).
The default rating is assigned even though the credit institution may not yet have incurred a monetary loss. In lending, the default rating nevertheless has far-reaching consequences; the exposure is transferred to restructuring support, new loans are generally impossible (only in the context of restructuring), and the business relationship may be terminated.
Guard rails for rating rescue:
- Approach your financing partners early, if possible before the liquidity crisis – once the 90-day default has occurred and the default rating has been assigned, the credit institutions no longer have the opportunity to take countermeasures!
- Don’t wait until your corporate account manager learns through the press or in a roundabout way that your company is in trouble.
- Collect all relevant data and prepare them in such a way that the bank gets a good picture of the current situation and the creditworthiness of your company with just a few glances and your explanation. Create maximum transparency in the process – if risk-relevant aspects come to light later, trust will definitely be disturbed.
- Create a robust plan of action (restructuring concept) that shows a way out of the crisis based on realistic assumptions.
- Do not hesitate to call in specialists you trust (tax advisors, restructuring experts)!
F&P is at your side with a high level of expertise, even when the wind is blowing hard from the front! We are happy to support you in rating rescue, restructuring concepts, the restructuring of financing or negotiations with your financing partners.
Contact blog author Moritz Jaeckle at email@example.com.