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Basel II is understood as the regulation of the minimum net asset demands for credit risks. The banks have to deposit, depending on the risk, either more or less net asset (depending on the rating). Here this means more net asset and therefore higher net asset costs. These higher costs are passed on to the debtor through risk depending interest rates. Therefore the rating of the customer plays a decisive role. A bad rating can imply a higher interest rate of a couple of percentage points. We would like to point out that the rating is generated on the basis of hard facts and soft facts. Not many know that both hard facts and soft facts can be influenced.
Rating

What does rating mean?
The valuation of a debtor for the possibility that his /her credit liabilities are done on time. Banks are using a standardised method which can vary from bank to bank. The result of all methods is a classification of the debtor in a risk class. In the future the price of the credit will be directly dependent on the class classification. All rating methods differentiate hard facts (finance rating) and soft facts (qualitative criteria).
The finance rating is based upon different key data which are generally determined from the last 3 financial statements.
The following key data are of vital importance:

Equity ratio
Debt service
Capital structure and
Committed assets
These key data give an overall impression of the economic situation of a company. The weighting and valuation of the operating figures differ from bank to bank.
Soft facts

Soft facts describe future aspects like chances and risk potential.

In detail this means
Check up on the accounting (annual financial statements on time, comprehensible figures)
Quality of the planning (realistic figures, complying to the concept, continuous target/actual comparisons, design of the control instruments)
Management. Does a corporate concept exist?, a business-plan?, is it comprehensible?; Business safeguarding, like succession and substitution regulations
Attitude towards the bank, submission of statements on time, cooperativeness
Market and development. Issues like competitive position, industry and business cycle development, dependency on suppliers and customers (ABC – analysis) will be analysed
The payment history like account transfers, overdrafts and tight liquidity positions will also be analysed.

Exceptions:

From our point of view it is important to arrange a meeting with the bank to discuss the rating. The knowledge of his/her own rating is very important, if you wish to work on an advancement.


TIPS for the rating advancement:
Development of an effective accounting and reasonable check-up tools
Implementation of a corporate planning with an integrated planning of the liquidity necessity
Increase of net equity
Development of an open communication and information transfer, together with your bank
Improvement of the cash collection process to reduce the writing off of payments
The improvement of the balance sheet structure can also improve the rating.
Arrangement of business safeguarding in case of need, succession regulation

Our know how as Basel II consultants, is not the only thing we provide in this area, we also accompany you if you wish!

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