Rating rescuein the crisis

F&P Blog

A rating may only consist of a number or one or more letters, but as a credit rating it can be decisive for successful financing.

In this blog, I have summarized why it is important to think about your rating and what options there are for an effective rating rescue in a crisis.

The crisis is here

The scenario is familiar: the company is in crisis, what was once a crisis of success is slowly turning into a liquidity crisis, following the usual sequence of crisis stages in companies. First, payment targets are fully utilized and overdrawn, increasingly the credit lines are at the limit, direct debits are returned by the bank.

The role of the bank

It is often only at this stage that contact is made with the company’s bank and other financing providers and an extension of the credit lines is requested. The rude awakening often follows when the extension of credit lines or a new loan is not approved. If approval is granted after all, the interest rates are much higher than expected and the company’s creditworthiness is shaky.

Creditworthiness

Creditworthiness plays the all-important role for financing partners when it comes to granting new loans or extending existing loans.

An assessment of creditworthiness is made with the aid of an (external or internal) rating, which makes a statement about the borrower’s probability of default within one year.

Internal ratings

Internal ratings are determined by banks with the aid 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 on the basis of “hard” financial figures (current and forecast) and “soft” criteria such as: company management, competitive positioning, sector, employee situation.

Default rating

Creditworthiness and therefore internal ratings are subject to constant monitoring at banks in order to be able to recognize changes in creditworthiness promptly.

In the following constellations, the borrower (and its liabilities) is considered to be in default and a default rating is assigned:

1. 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 a crisis-related restructuring of the liabilities.
2. 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. Nevertheless, the default rating has far-reaching consequences for lending: the exposure is transferred to restructuring support, new loans are generally not granted (only in the context of restructuring) and the business relationship may be terminated.

Guard railsRating rescue

• Approach your financing partners at an early stage, if possible before the liquidity crisis – once the 90-day delay 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 customer advisor hears through the press or indirectly that your company is in trouble.
• Collect all relevant data and prepare it in such a way that the bank can get a good picture of the current situation and the creditworthiness of your company with just a few glances and your explanation. Create maximum transparency – if risk-relevant aspects come to light at a later date, trust will have been undermined for good.
• Create a robust action plan (restructuring concept) that shows a way out of the crisis based on realistic assumptions.
• Do not hesitate to consult 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 with rating rescue, restructuring concepts, the restructuring of financing or negotiations with your financing partners.

Your expertfor Finance