Criteria are principles or standards by which something may be judged or decided. A rating criterion is the basis, point of reference, standard, norm, yardstick, benchmark, or touchstone, figuratively speaking. Criteria are based on a test, formula, measure, gauge, scale, barometer, indicator, like a litmus test. Criteria require specifications, guidelines, rules, or even laws and convention.
Mistreating workers is not as important as mistreating animals.
Consumers play an active role in the application of ESG criteria, i.e. Environmental, Social, and corporate Governance data that refers to metrics related to intangible assets within the enterprise. A survey throws a dubious light on the values of American and German consumers.
According to a survey published by Statista, the number one reason to “cancel” a brand – or at least boycott or protest them – is the mistreatment of animals: “Animal cruelty was named as the top reasons why consumers would give up on a brand in all three countries included in the Cancel Culture survey which is a content special of the Statista Global Consumer Survey. 44 percent of the more than 1,500 U.S. respondents said they would give companies mistreating animals the boot, ahead of the mistreatment of workers at 41 percent. UK respondents saw things similarly, while in Germany, worker mistreatment only came in rank six after environmental harm, corruption, health concerns around products and racism.”
Austria’s Financial Market Authority (FMA) warns consumers against “greenwashing” in the new edition of their consumer information series “Let’s talk about money”.
“Greenwashing” means that a financial product is advertised as environmentally friendly, green or sustainable – i.e. colored green – even though it does not actually meet these standards. In this way, potential investors are to be tempted to make investments that they would not have made or would only have made at a different price with knowledge of the actual effects of the financial product.
“Greenwashing” is carried out in particular through misleading or false information in advertising, consultations and product documentation. It is often associated with a corresponding optical design, for example through the use of the color green and through representations of unspoiled nature.
Furthermore, terms such as “ecological” or “green” are often used, or a certification that does not even exist is advertised, reports the FMA. The FMA report could be supplemented by a warning about sustainability ratings that were either developed in a fast-track process and thus ignoring a number of important aspects, or even applied without any technical expertise.
Environmental, Social, and Corporate Governance (ESG) refers to the three central factors in measuring the sustainability and societal impact of an investment in a company or business. Some rating agencies are providing investors with its ESG analysis through a digital platform, comprising more than 1,600 companies in the MSCI world stock market index. They claim to have methodology that is applicable to the whole universe of corporates, from small and medium-sized companies to large listed multinational enterprises.
Such claims are a clear indication that the complexity of the analysis is being underestimated, especially when a team of analysts who is only very small in relation to the number of companies assessed and overwhelmed by the size of the task is involved in the acquisition and evaluation of the data.
Therefore, investors should heed the regulatory warnings: “Sustainable investments are not per se safer than comparable conventional investments. Always ask questions and be critical,” warns the FMA Board of Directors, Helmut Ettl and Eduard Müller. Particular caution is required on the so-called “gray capital market”, that is, the unregulated capital market.
Investments in “green real estate”, wind and solar parks or hydropower plants are often offered in the “gray capital market”. If such projects are designed as qualified subordinated loans, company investments, bonds or profit participation rights, one should be aware that if the company becomes insolvent, all the money invested can be lost.
Many western states do not give China a good role model for further developing the political system.
All leading rating agencies – FitchRatings, S&P, DBRS Morningstar – give the People’s Republic of China a credit rating of A+ or A1. Moody’s credit profile of China (issuer rating A1) is supported by the country’s “a1” economic strength, but also – among other factors – drawn down by the country’s “baa” susceptibility to event risk, driven by risks posed by the banking sector, as well as by external vulnerability risk and political risk due to geopolitical tail risks.
However, many countries with better credit ratings, AAA or AA, do not offer the People’s Republic of China any examples to emulate. Only in kingdoms are there people who are granted a special position in politics and society at birth. In China, too, children of influential politics certainly have advantages in life. But these advantages are not guaranteed by the constitution or law, as in Western and Japanese monarchies: An unacceptable idea for the Chinese.
Absolute and semi-constitutional monarchies are most common today on the Arabian Peninsula, even though Morocco, Brunei, Eswatini and Liechtenstein also count among them. Semi-constitutionalism – where monarchs and elected representatives share powers – ranges from countries which let monarchs retain some powers next to an elected parliament to so-called elective monarchies, which elect leaders from a group of royals – the governing system of the United Arab Emirates. The Pope is also elected from a group of Cardinals, but he is the singular ruler over the Vatican, therefore considered an absolute monarchy.
Understanding the importance of sustainability has popularized an asset class that used to be reserved for the state, churches and nobles. Forest – to be precise its wood – has always served people as fuel, product and building material. Forest has now become the epitome of sustainable investments. The idea of sustainability emerged in a time of crisis and scarcity. Around 1700, the mining industry and livelihood of thousands was threatened in Saxony. The problem was an acute scarcity of timber. The mining industry and smelting of ores had consumed whole forests. Trees had been cut at unsustainable rates for decades without efforts to restore the forests. In Germany, the term sustainability is associated with Hans Carl von Carlowitz. He was raised in and influenced by the aforementioned environment of wood scarcity. He traveled widely in his youth and learned much from the forced discipline of the French minister Jean Baptiste Colbert, who had enacted a forestry reform in France. Carl von Carlowitz’ view that only so much wood should be cut as could be regrown through planned reforestation projects, became an important guiding principle of modern forestry.
In this preliminary article you can learn more about some risks and rewards of buying forests and what you should consider when buying forests. Given the popularity of forest investments, the question arises as to which ratings are available to investors as decision-making aids. The first question to be asked is which instruments can be used by investors to tap into this asset class. The most common investments in forests are shares, direct investments or closed-end funds. Whereas in direct investments investors invest directly in one or more trees on specific areas and leave the management to a service provider, closed-end forestry funds are less individual.
A forestry share is a security which securitises a share in a stock corporation whose capital is invested to a large extent in forest property or wood processing. Primarily Scandinavian and North American forestry stock corporations are traded. There are no German forestry stock corporations with significant free float on the stock exchange. Buying forestry shares does not necessarily mean planting new trees.
A closed-end forestry fund or closed-ended forestry fund is a collective investment model based on issuing a fixed number of shares which are not redeemable from the fund. Unlike open-end funds known for corporate stock and bond investments, new shares in a closed-end forestry fund are not created by managers to meet demand from investors. Instead, the shares can be purchased and sold only in the secondary market, which is the original design of the mutual fund, which predates open-end mutual funds but offers the same actively-managed pooled investments.
Direct investment in forest means becoming the owner of the forest yourself and thus acquiring all the rights and obligations of a forest owner. The investor needs to be able to maintain regular forest care. As a forest owner, you also have certain obligations, since you are legally obliged to ensure road safety. This means that all trees and branches that are located in places with increased traffic – for example on country roads or hiking trails – have to be felled or trimmed as soon as they pose an increased risk for humans. Buying forests also means taking responsibility.
The implications for the rating approaches to these investment alternatives are considerable.
Forestry shares being tradable on the stock exchange at any time are subject to extreme fluctuations in value. The valuation of most listed forestry shares has a history of having fluctuated by several hundred per cent. Such fluctuations in value mean that ratings of these stocks can quickly become out of date. In fact, a buy recommendation can turn into a sell recommendation within a day if the stock market price quickly exceeds the fair value. Most forestry share companies are predominantly wood processors, who are strongly affected by economic fluctuations and thus by fluctuations in pulp or timber prices. Therefore there is a strong dependence of many forestry shares on economic trends.
Direct forestry investments in precious woods, on the other hand, can react better to market fluctuations by postponing the harvest. The trees are left in the forest until the harvest is worth it – they become bigger, taller and more valuable every day. Fuctuations in precious wood prices have historically been significantly lower than those of timber or wood used for pulp production.
In Germany in particular, the very contradictory regulations must be observed. For decades, the German government has not consistently supported wealth creation through property acquisition. Pay attention to the municipality’s right of first refusal. In this sense, there are no secure legal bases for forest investments in Germany, because rights of first refusal can hinder both buying and selling. In addition, the following contradictions must be observed.
The yields generated from a direct forestry investment are generally tax-exempt while the price gains of forestry shares and forestry shares dividends are subject to the almost 30 per cent flat rate withholding tax including solidarity surcharge and church tax. On the other hand, the transaction costs are significantly higher than with stocks. In addition to the purchase price, land transfer tax, notary and fees, which often make up ten per cent of the purchase price, are added, thus significantly reducing the returns for forest investors. Property tax has to be paid annually and wood production in Germany is relatively expensive due to environmental regulations and certifications. In addition to the actual purchase price, there are also other costs when buying a forest which would not be part of the rating analysis of an independent forest rating. For example, you have to include the costs for the notary, usually 1.5% of the purchase price (the percentage can be higher for small areas) and the property transfer tax, around 4% – 6.5% of the purchase price. You must also not ignore the broker’s commission.
As a forest owner, you also have to pay additional costs.
Property tax, accident insurance and, if applicable, contributions from the soil and water associations are to be mentioned here. With the management of the area, the ancillary costs are always offset by possible income from the sale of wood.
Forest areas in other countries offer far higher returns, although buying forest in foreign countries can be difficult for foreigners. It is much easier to hire companies to lease or buy forests or fallow land in other countries, to manage them in order to generate yields for investors. The country rating must be taken into account for every investment abroad. The country rating is used to assess the economic, social and political risk that an investor will be prevented from receiving the income due to him.
Forest investment providers advertise the scarcity of forest. They argue, that the benefits of forestry investments are the growing demand for the raw material wood. Whether there are fewer and fewer forest areas and whether the demand for wood exceeds the supply has to be tested continuously.
Forestry investments are not always socially beneficial, especially when stock corporations and other big companies buy cheap land in foreign countries and perhaps even displace locals, or the price of land for local residents rises immeasurably as a result of land purchases. Forests are not always ecologically friendly. Thousands of hectares with cloned eucalyptus or teak planted in rows are no gain for nature. Many insecticides and pesticides that pollute and destroy the soil and the environment are sometimes used to increase output.
In any case, structurally rich forests with many different tree species offer a better and safer alternative to planted conifer monocultures that are based on only one tree species. Although these grow faster, they are also susceptible to storms, snow, ice and pests. Mixed forests of deciduous and coniferous trees are not only more stable and better adapted to climatic changes, they also allow you to react more quickly to changes in the demand for wood species on the market.
Any forest rating should also pay attention to the age of the forest. Young forests, in which there are only a few old trees, initially require more maintenance. Of course, they can more easily be designed according to your ideas. The young forest will initially generate little income from wood sales through its maintenance. Forests of old age with significantly taller and thicker tree trunks enable an early profit from the logging and sale, but require care for the new generation of trees.
Good soil and suitable tree species mean that larger quantities of wood of better quality can be expected in the long term.
This is likely to be reflected in the cost of purchasing the forest, especially if the seller has had the forest valued by an appraiser. Regardless of the quality of the soil, its location is a decisive criterion for price formation. So it depends a lot on where the forest is located. A forest area near Munich will therefore cost significantly more than a similar one in the countryside in Saxony-Anhalt. The standard land value is derived from the average price of areas sold in the area and, in addition to the special features of the forest area offered, serves as an aid to determining the actual value.
If the forest is well cared for and there is already a lot of high-quality wood to be expected on the area initially, then you should also expect higher costs. In any calculation, bear in mind that there are usually additional costs for managing the forest. So you cannot count the expected cubic meters of harvest one-to-one with the wood prices and use this to conclude the profit. If the area is difficult to access, the wood harvest is also time-consuming. If it is a particularly protected forest, for example in a nature reserve, then management is only possible to a limited extent. The ideal value of these forest areas is all the higher for one or the other, especially if rare animal and plant species live in this forest. You should therefore be clear about your goals in advance and only acquire forest if it fits your previously set goals.
In addition, a forest rating process should include a step in order to check any “contaminated sites”. For example, if the forest is on a former military site, the trees there may have been damaged or the ammunition in the ground has to be laboriously cleared.
All closed-end forestry fund investments have one risk factor: the long contract term. Even with sustainable forestry investments which respect human rights and the environment, the planted trees need lots of time to grow. On ecologically farmed land, they probably take even longer to grow than the fast-growing trees in monocultures, which are harvested earlier, to produce cheap pulp and biomass. During long contract terms, much can happen: companies can fall victim to mismanagement or go bankrupt, the regions in which the forests grow can become politically unstable.
Natural events such as fire, earthquakes, droughts or floods also have a lot of time to occur over the years.
Forestry investment are therefore right for investors in particular if they do not shy away from risks, have the necessary financial means and staying power until the trees generate returns. If you take over a neglected forest that does not promise stability and is therefore susceptible to pests or storms, that does not necessarily mean that it is a bad deal. Careless forest care can have a positive impact on the purchase price and there may be a lot of potential in your future forest. An unkempt forest can be a deterrent, but it is up to the investor to shape and maintain the forest. What possibilities are opening up in the forest and what additional costs have to be reckoned with for any maintenance measures? With almost every intervention in the forest, whether in well-tended or unkempt forests, financial resources are necessary.
Some native tree species have been planted in the wrong locations in the past. This can result in poor growth, instability and increased susceptibility to damage. To select tree species that are appropriate to the location requires a lot of expertise. To increase the stability of a forest and make it fit for the next centuries requires a forestry rating first.
Ecological goals or enjoying forest ownership are important motives for some investors. Because while it has a personal value for some, only the regularly generated income plays a role for others. However, if one compares direct forest investments with other investment options such as stocks, then short-term gains are generally not to be expected. Every rating approach for direct forest ownership has to take this into account. Forest ratings are possibly the ratings with the longest time horizon. Long-term bond ratings – for comparison – usually only refer to a forecast period of four to five years.
Forests give us the sustainable resource wood, which will also be of ever greater importance in the coming generations.
That makes the forest relatively stable as a system. However, for a fast growing return, other investment methods are a better alternative. So buying a forest is a decision that should be made not only for financial reasons, but also for a certain amount of idealism and enjoyment of nature. Forest investors are similar to investors who invest for ethical, ecological or social reasons.
Forest has been in great demand in Germany for a number of years and has often been family-owned for generations. In addition to the forest exchange, there are a few other real estate portals and tender platforms on the Internet that also offer forest. Depending on the respective provider, there may be costs for registration or an application. In some cases, brokers are also placed between the buyer and seller from the outset.
A responsible forest office or an auction houses in the area, the member newspapers of forest owners’ associations for forest pieces on offer or the advertising section of the regional newspapers might provide information on forest for sale. With currently estimated 1.9 million forest owners in Germany, investors are also well advised to ask around in their private or professional environment. The chance that you have forest owners in your circle of friends is quite high.
The reforms launched by Deng Xiaoping, embodied in the 1979 promulgation of the Joint Venture Law and in the establishment that same year of the China International Trust Investment Corporation (see, respectively, Richdale and Liu 1991, pp. 125–128; Collier 2017, pp. 74–77), led to four decades of sustained GDP growth – nearly 10% during 1979–2016 – and propelled China to its position as the world’s second-largest economy.
Beijing learned from the success of newly industrialized countries yet followed its own path. It attracted FDI, managed to obtain technology transfers, and moved up in the manufacturing value chain. In addition, Chinese authorities opted for financial repression measures in order to channel growing savings toward domestic firms and to facilitate the undervaluation of its currency. These policies yielded spectacular results: between 1991 and 2016, the share of China in world trade, inward FDI stock, and outward FDI stock rose by a factor of 9, 5, and 23, respectively (see Figure 1)1. The country is now a major capital exporter and, for the first time ever, its outward FDI stock exceeded its inward FDI stock in 2016.
Source: Author calculations based on https://unctad.org and the World Bank’s World Development Indicators.
This emergence of “the Middle Kingdom” reshaped the world economy as well. Several structural trends can be observed. Chinese demand led to a boom in commodity markets during the 2000s (e.g., crude oil, aluminum, copper, iron ore, soybeans), which supported economic growth in emerging countries as well as in Australia and Canada (World Bank 2009, pp. 51–73; Roberts et al. 2016).
Moreover, China’s capacity to produce and export a massive quantity of low-priced manufacturing goods had deflationary effects on the rest of the world; this dynamic has depressed the profitability of its foreign competitors and in some cases has led to their bankruptcy (Qiu and Zhan 2016, pp. 49–51).
The combination of these trends entails that emerging economies risk losing part of their industrial capabilities and also risk being confined to the production of agricultural and mining products. These downsides are a major challenge for countries seeking to diversify their economy (see Costa et al. 2016, who examine the case of Brazil).
Another aspect of China’s success was the rapid ascent of its firms in the global value chain: some of them managed to upgrade their status from subcontractor (to Japanese, US, or European MNCs) to international leader in certain sectors. Lenovo and BYD are two examples. Lenovo was Hewlett-Packard’s distributor in China in the 1990s before acquiring IBM’s personal computer segment in 2005.2 Established in 1995, BYD started out manufacturing rechargeable batteries but expanded its activities to become the world’s third leading seller of plug-in electric vehicles in 2016 – trailing only Tesla and Renault-Nissan.3
The Chinese growth model provided an alternative to liberal capitalism and thus restored the status of state capitalism in the eyes of some foreign policymakers. Beijing promoted this model and developed training programs for Asian and African officials (Kurlantzick 2016, pp. 108–114). However, such initiatives were limited by the failure of state capitalism in most countries (especially in Algeria, Argentina, Iran, and Venezuela).
1 Author calculations based on https://unctad.org and the World Bank’s World Development Indicators.
2 See “Legend in the Making,” The Economist, 13 September 2001, and Sumner Lemon, “Lenovo Completes Purchase of IBM’s PC Unit,” PC World, 2 May 2005.
Collier, A. (2017), Shadow Banking and the Rise of Capitalism in China, Palgrave Macmillan, London.
Costa, F., Garred, J. and Pessoa, J. P. (2016), “Winners and Losers from a Commodities-for-Manufactures Trade Boom,” Journal of International Economics, Vol. 102.
Kurlantzick, J. (2016), State Capitalism – How The Return of Statism is Transforming the World, Oxford University Press, Oxford and New York.
Qiu, L. D. and Zhan, C. (2016), “China’s Global Influence: A Survey Through the Lens of International Trade,” Pacific Economic Review, Vol. 21 (1).
Richdale, K. G. and Liu, W. H. (1991), “The Politics of ‘Glasnost’ in China, 1978–1990,” Journal of East Asian Affairs, Vol. 5 (1).
Roberts, I., Saunders, T., Spence, G. and Cassidy, N. (2016), “China’s Evolving Demand for Commodities,” in Day, I. and Simon, J. (Eds.), Structural Change in China: Implications for Australia and the World, Reserve Bank of Australia, Sydney.
World Bank (2009), Global Economic Prospects: Commodities at the Crossroads, Washington, DC.
He believes that the mission of his company is unique in Germany. Although there are two institutions, the German Central Institute for Social Issues (DZI) and PHINEO that assess charity organizations, Sebastian Schwiecker points to fundamental differences in the approach to effektiv-spenden.org.
The DZI, founded in 1893, has been awarding the DZI donation seal since 1992. To obtain this, an organization must undergo an annual audit. If the DZI standards are adhered to, the organization receives the DZI donation seal for the next 4 quarters. The following three are the main points:
The fundraising campaign is true, clear and factual.
The donations are used purposefully, economically and economically.
The organization has functioning planning and control.
Sebastian Schwiecker does not question, that these are criteria that must be met by an organization that wants to provide sustainable, highly effective aid. However, they are not sufficient, says Sebastian Schwiecker, since it would be necessary to examine the effect achieved by the respective aid organization and to put this in relation not only to the costs, but also to other organizations. The DZI does not do either. The information available online about the organizations with the DZI donation seal is limited. On the profile of the World Vision organization, whose total income in 2018 was more than 114 million euros, the full paragraph on the use of funds reads as follows (translated from German):
The DZI itself does not examine the effect achieved, Sebastian Schwiecker criticizes and considers the publicly available information as very scarce with less than 500 words per audited organization. For comparison, Sebastian Schwiecker mentions the evaluations by GiveWell on which the recommendations of eeffektiv-spenden.org are based. Here even some of the often more than 100 footnotes are longer than the complete organizational profiles on the DZI website.
Due to this superficial view and the – in the eyes of Sebastian Schwiecker – large number of organizations with the DZI donation seal, most recently well over 200, interested donors are only given limited orientation. Sebastian Schwiecker cautions that the designation of the DZI as “donation TÜV”, which is often used in the media, may be appropriate, but one should be aware that the task of the TÜV is to exclude unfit vehicles from road traffic and not to judge what is best in relation to its costs.
The situation is different with the PHINEO consulting company founded in 2009. Since 2010, it has been awarding the so-called Wirkt-Siegel, which differs from the DZI donation seal primarily in that it carries out a “differentiated assessment of the potential for impact and the quality of the project”. On the one hand, PHINEO concentrates exclusively on projects that are active in Germany. In this way, the most effective approaches from the perspective of effektiv-spenden.org are excluded from start, although even more than in Germany might be achievable with every euro in very poor countries. On the other hand, PHINEO does not compare the audited organizations with one another, argues Sebastian Schwiecker.
If a donor does not want to be satisfied with contributing to positive change at all, but rather pursues the goal of moving as much as possible and as effectively as possible with the resources used, the Wirkt-Siegel offers little support, Sebastian Schwiecker points out, although he admits that he could not claim scientific objectivity for his approach. “But we are firmly convinced that ceterus paribus it is better to help more people than less. To do this,” reads his website, “one has to start by asking the right question, which is who should I support to maximize my impact? So far, nobody in Germany has done that. We want to change that!”
The COVID-19 pandemic has profoundly affected the lives of countless people around the world, with women being the hardest hit.
Not only because they have a higher risk of COVID-19 infection due to their work in the health sector, but also because they are over-represented in professions where keeping your distance is more difficult and dismissals are more common. Many women have had to take a break from work to look after family members. In addition, women are often employed in micro and small businesses, where they are paid lower wages and have little legal and social protection. If in informal employment their situation is even more precarious. These factors make the decision to quit working life easier. This is how gender equality is reversed.
Activity rates show that there are record numbers of women leaving the labor market worldwide, and this trend could persist. The longer women stay away from the labor market, the higher the risk that their knowledge and skills will dwindle and that they will permanently lose their income and their prospects. Even before the pandemic, no country was able to fully achieve gender equality, as is the aim of the UN Sustainable Development Goals. In terms of access to (quality) education and participation in the labor market, as well as women-run businesses, such equality is now further away than ever before. Since the beginning of the pandemic, girls in low-income countries have been losing access to education in large numbers, says Triodos Investment Management in a communication on impact investing.
So-called “Inclusive Finance” can help achieve gender equality in the post-pandemic economic upswing. Without education, the chances of access to the labor market are considerably reduced. But women also encounter other obstacles in their professional lives. Access to credit is a major concern for small and medium-sized businesses worldwide. Insufficient access to financial services is a major concern. This situation will be exacerbated by the pandemic. Other barriers are closely related to the traditional role of women and the availability of childcare.
In general, financial integration enables people and companies to better manage and plan their economic situation. More precisely, “inclusive finance” can help make the post-pandemic economic recovery gender-sensitive. Some asset managers have been investing to generate social and environmental impact alongside a healthy financial return for decades already. One example is Triodos Investment Management.
Triodos Investment Management‘s claim is to place a high value on a number of sustainability criteria in its investments, including income, environmental protection and gender issues. In terms of gender equality, some of the barriers can be removed and women and girls enabled to participate in society. “The companies and financial institutions funded by Triodos Investment Management can enable women to develop their potential and participate in the economy”, according to the Triodos Investment Management.
Vectron Systems AG (Vectron), a leading provider of intelligent, digitized cash register systems consisting of hardware, software and cloud services, with a focus on the gastronomy and bakery sectors, has created itself a better position for its credit ratings. A stable rating history is ensured in particular by sustainable, recurring income. Vectron makes use of this effect to its advantage.
The company has signed a contract with the von Allwörden Group for an extensive renewal of the cash register fleet. As the report from Vectron shows, this contract is a new way of moving away from one-off income to permanent sources of income.
With a total of 493 branches, the von Allwörden Group – i.a. with the brands “Von Allwörden”, “Nur Hier” and “Dallmeyers” – one of the largest bakery chains in Germany. With more than 225,000 installations, the listed Vectron Systems AG is one of the largest European manufacturers of POS systems. The Allwörden Group is now having a large part of its cash fleet renewed.
At the same time, all branches will be equipped with digital services such as the bonVito customer loyalty system. The customer receives hardware, software and digital services within the framework of a 60-month overall contract that will significantly increase recurring income at Vectron, says the company. Even if the exact contractual conditions – it was agreed not to disclose – are not known, it is clear that this will stabilize earnings for the next few years.
“With this innovative offer, Vectron is increasingly relying on recurring income instead of one-off sales revenues in the core business of bakeries,” explains Thomas Stümmler, CEO of Vectron Systems AG.
The Artprice Report, covering 20 years of Contemporary Art auction history, is a basis for understanding why evidence-based “art rating” is more important and urgent today than ever before. The complexity and global nature of the art market has never been greater.
In the last two decades, decisive impetus came from China. “In 20 years,” writes Thierry Ehrmann, CEO and founder of Artprice by Artmarket.com, “the growth of Chinese turnover in the Contemporary Art segment has been phenomenal: multiplied by 65. Including Hong Kong (10%), China generated 33% ($659 million) of the global market in 2019) versus 35% ($695 million) for the United States.”
Thierry Ehrmann sees a multitude of sociological, geopolitical and historical factors, all of which contributed to the rapid rise of Contemporary Art in the global Art Market: “A marginal segment until the end of the 1990s, Contemporary Art now accounts for 15% of global Fine Art auction turnover, and is now its primary growth driver, having increased +2,100% over 20 years.”
Undergoing profound structural changes, with evermore artists (from 5,400 artists to nearly 32,000 today) and evermore artworks (from 12,000 lots offered to 123,000) the 2000 to 2019 numbers show an expansion also geographically, from 39 to 64 countries active in auctions.
“One of the primary factors in its growth was the relatively sudden accession of Chinese buyers to the market, whose arrival also fundamentally transformed it. With the explosion of the Chinese economy, wealthy entrepreneurs began taking an interest in art collecting, while others started buying artworks to diversify their investments.”
The increasing resemblance of the art market to the capital market leads to calls for agencies that – similar to rating agencies like S&P Global or Moody’s on the capital markets – provide investors with market data and data on risks as reliable data providers and opinion leaders.
“The emergence in China of an ‘art business’ sector was both rapid and impressive,” says the Artprice Report, “and it included the appearance of specialized art investment funds. Mimicking stock market practices, ‘shares’ in works were offered with a view to making significant capital gains, quickly if possible.”
“Meanwhile, China began to play a much more active role in the global market. Driven by frenetic economic growth,” goes the simple causality, “it became the new counterbalance to the United States (which it overtook for the first time in 2010). The Chinese eldorado became more and more attractive to international investors, including the world’s leading auction operator, Christie’s, which decided to focus its sales on Shanghai.”
China not only has an impact on market conditions, but also on Contemporary Art itself. In 2019, Jeff Koons’ status of world’s most expensive living artist was reconfirmed thanks to a sculpture which sold for $91 million. The object of the new record was “兔子” (Rabbit, 1986) – considered the most iconic of his works and, by extension, one of the most iconic works in the entire canon of Contemporary Art.
Art rating criteria need to be reconsidered. As the Artprice Report shows, the top positions of the internationally most sought-after artists are taken by the Chinese. This fact shatters, for example, the image of the People’s Republic of China that is widespread in the West as a hardly democratic state with restricted freedom of artistic expression. These restrictions should theoretically have a negative effect on ratings. According to evidence provided, free market conditions in China mobilized more capital and more artistic talent in such a short time than any other country in the world. The economically liberal working environment for cutting-edge artists in China seems to be more inspiring than for their peers in highly state-subsidized art sectors in the West. However, the relevance and siginificance of rating factors and the relationships with other rating criteria require further research.
Companies such as Artprice.com (changing its name to Artmarket.com) and Artnet.com are benefiting from these developments. For the latter, listed company, the share price has more than doubled in the last six months alone.
Moody’s “General Principles for Assessing Environmental, Social and Governance Risks” relate to issues which may have greater downside risk than upside potential for rated issuers. The introduction of these principles is perceived by many issuers as an additional pressure that weighs on them in order to prove their sustainable management. This pressure is unsettling, especially since eco-activists seem uncessantly to come up with new ideas about what additional requirements companies should meet. However, Moody’s methodology shows what rational consideration is all about.
As an example, a company with a track record of health and safety violations may face litigation risks that pressure its operating income, whereas another company that demonstrates outstanding health and safety practices may not see a comparable credit benefit.
Environmental, Social and Governance (ESG) considerations are not always negative; they can be credit strengths. A company or government that has outstandingly strong governance is more likely to have a management culture of 360-degree risk assessment and informed decision-making, which support long-term creditworthiness. Due to the relatively low incidence of ESG strengths that are meaningful to credit profiles, they are also more likely to be considered in other rating considerations outside of a scorecard, but there are exceptions. An example is the business profiles and cash flow stability of renewable energy developers. They may benefit from supportive government policies.
The term ESG refers to a broad range of qualitative and quantitative considerations that relate to the sustainability of an organization and to the broader impact on society of its businesses, investments and activities. Examples include a company’s carbon footprint, or the accountability of a company’s management or a nation’s government.
The criteria used by ESG rating agencies vary widely. Investors as well as issuers complain about the different assessments. In particular, there are no standards by which the correctness of ESG ratings can be objectively checked. The arguments ultimately remain tautological: If arms production is deemed unethical, then companies receive a poor ESG rating if they manufacture weapons. The “performance” of the ratings of an ESG rating agency is good if it has correctly identified companies that manufacture weapons. But whether the underlying dogma is correct is not discussed.
The classification of ESG considerations across financial markets is imprecise, due largely to the multiple and diverse objectives of various stakeholders. Ethical judgments differ massively, even if they have common roots, as in the case of the three world-leading religions of Abraham. Leading credit rating agencies like Moody’s therefore do not get involved in the moral discussion. Instead, they are focused on the aspects of ESG that can have a material impact on the credit quality of an issuer.
Several institutions, notably the Principles for Responsible Investment and the Sustainability Accounting Standards Board, have sought to establish voluntary definitions for ESG, but at this point there is no single set of ESG definitions or metrics that is comprehensive, verifiable and universally accepted. It is not just Jewish, Muslim and Christian approaches that differ. There are thousands of differences among Christians alone. Arbitrary definitions of human rights, fundamental rights, etc. are the result. Legal definitions are therefore only the result of political negotiation or enforcement processes in a political trial of strength and should not be confused with something scientifically observable in nature.
Therefore, the definition of ESG issues is also dynamic because what society classifies as acceptable evolves over time, resulting from new information (e.g., the impact of carbon dioxide emissions) or changing perceptions (e.g., what constitutes privacy). The only way for serious credit rating agencies is therefore to provide transparency into their assessment of ESG risks and benefits by developping an ESG classification nomenclature that includes
components (E, S and G) and, for each component,
categories and
subcategories of the ESG considerations that rating analysts view as most likely to have credit implications across sectors.
“For the E component, the categories are the same for public- and private sector issuers,” writes Moody’s in its updated cross-sector methodology, “and for S and G components, there are different categories for public and private sector issuers.” The materiality, time horizon and credit impact of ESG risks vary widely. Issuers’ fundamental credit strengths or vulnerabilities can mitigate or exacerbate ESG credit impacts. In some cases, ESG-related benefits can be a credit strength. ESG considerations may inform forward-looking metrics or scenario analyses, or they may be incorporated qualitatively.
Given this background, a credit rating agency should seek to incorporate all material credit considerations, including ESG issues, into ratings and to take the most forward-looking perspective that visibility into these risks and related mitigants permits. An ESG rating methodology should only discuss the general principles underpinning the analysis of current and developing ESG risks that can affect credit quality for issuers and transactions in all sectors, because only defaults can be statistically recorded and counted and can thus prove the objectivity of the standards. In this way, credit rating agencies secure the trust of investors who expect rating analysts to provide clear assessments of default probabilities. Moody’s “General Principles for Assessing Environmental, Social and Governance Risks” delivers an example of this approach to ESG considerations.
The Berlin-based Deutsche Fachmarkt AG (DEFAMA) invests specifically in small retail properties in small and medium-sized cities, predominantly in northern and eastern Germany. The most important purchase criteria are two or more chain stores with good credit ratings as anchor tenants, if possible no more than 10 tenants and an annual net rent of at least € 100 thousand. The aim is a continuous double-digit net rental return.
DEFAMA’s declared aim is to become one of the largest owners of small retail parks in Germany in the long term. The DEFAMA share is traded in the quality segment m:access of the Munich Stock Exchange as well as on the open market of the Frankfurt Stock Exchange and on XETRA.
DEFAMA has concluded a number of contracts and agreements and purchased a property, which will lead to an overall increase in annualized net rents of around € 250 thousand.
DEFAMA signed a purchase agreement for a local supplier near Magdeburg (Saxony-Anhalt). The purchase price is € 1.1 million, which is 10 times the annual net rent. The rentable area amounts to a good 1,000 square meters. The property is in a prime location directly on the main road in the center of the village next to the primary school, a bank branch and a physiotherapy practice and is rented to Netto on a long-term basis.
In addition, DEFAMA has concluded new long-term rental contracts in some existing properties. In Löwenberg, for example, a contract was signed with ALDI for an enlarged area. The building application has already been submitted, the corresponding renovation is to take place in the coming year. A contract was signed with Penny for an enlarged space in Hamm in late summer, reports the company. DEFAMA is also investing in Lübbenau, where the areas of Amplifon and the bakery are being enlarged. The total investment for all three measures is around € 2.2 million.
Furthermore, in the past few weeks alone, the anchor leases were extended by an average of 4 years in a number of properties. “No investments were necessary for this”, says Matthias Schrade, Management Board of DEFAMA: “This was done partly through the exercise of options, partly through supplements. LIDL extended in Waldeck and Traben-Trarbach, ALDI in Staßfurt, Penny in Rendsburg and Netto in Apolda. Including the exercise of options announced by another anchor tenant, the contracts in question correspond to around 6% of DEFAMA’s total annualized annual net rents.”
Overall, with the investments made of € 3.3 million, DEFAMA will increase rental income by around € 250 thousand p.a. The annualized FFO rises to over € 7 million or € 1.60 per share. Including the contract extensions, annual rental income totaling a good € 1.4 million is secured in the long term. This corresponds to around 10% of the total annualized annual net rents of DEFAMA and, based on the respective terms, rental income totaling over € 8 million.
Moody’s analysts have revised their environmental classification to reflect evolving environmental, social and governance standards, disclosure frameworks and market conventions among issuers and investors.
Environmental risks can arise from regulatory and policy issues, hazards or a combination of both. The five environmental categories Moody’s considers most material to credit are
carbon transition,
physical climate risks,
water management,
waste and pollution and
natural capital.
Moody’s identified these categories, which apply to both public and privatesector issuers, based on their alignment with evolving market standards and conventions.
These changes represent a reclassification and/or renaming of Moody’s previous environmental categories. The previous environmental categories were featured in an earlier, 2018 environmental heat map report. The analysts underline that it is not a change in the specific environmental issues being considered. It is important to understand that rating changes can result from changed criteria, models and weightings as well as from changed framework conditions and new data from the organizations to be assessed.
Each of the five categories has been cited as a material consideration in their rating actions. Environmental considerations are becoming more relevant to the credit quality of Moody’s rated issuers. Moody’s points out that environmental credit risk will continue to grow.
In their “sector in-depth” report “Heat map: Sectors with $3.4 trillion in debt face heightened environmental credit risk” Moody’s identifies sixteen sectors with $4.5 trillion in rated debt having very high or high inherent exposure to carbon transition risk. Eighteen sectors with $7.2 trillion of debt have high inherent exposure to physical climate risks and again eighteen sectors with $5.2 trillion in rated debt have very high or high inherent exposure to waste and pollution risk.
Eight sectors with $747 billion in debt face heightened inherent exposure to natural capital risk. Six sectors with $925 billion in debt have very high or high inherent exposure to water management risk, according to Moody’s.
Real estate remains the most popular form of investment among Germans. In times of volatile stock markets, a real estate investment is still seen by many private investors as a secure return opportunity. However, not all private owners use their apartments themselves, but rent them out. In doing so, however, they often underestimate the costs and time required for a new rental. A current analysis by the real estate technology company Home shows the costs that private owners will incur if they rent out their apartments on their own.
The apartment expert recorded any vacancy costs as well as the costs and time required for renovation, advertisements, the selection of tenants and the handover and compared the costs for a new lease for the different parts of the city in Berlin, Munich and Hamburg. With the German yield calculator from Home, landlords can individually calculate what renting their own apartment to Home would save.
It is the business model of Home to help landlords and tenants: “With Home, landlords no longer have to worry about anything. The primary goal of minimizing rental costs is to find the right tenant quickly. Home takes on this costly and time-consuming search and accelerates it through technologies such as contactless visits and digital contract signing. The company is rethinking the letting process and offers an all-round carefree package for homeowners.
Owners have to reckon with costs of more than 3,000 € for each new rental overall, renting a condominium in Munich costs the most, with costs of around 3,250 € for vacancies, renovations and looking for a tenant, including signing the contract and handover. In Berlin, owners should expect costs of around 3,090 €. Hamburg follows in third place with average costs of 3,080 €.
If the apartment remains unoccupied for a while between two tenants, this is annoying and can quickly become expensive – especially in Munich. On average, tenants in the Bavarian capital miss out on rental income of around 755 € with a daily rent of 37.89 € and around 20 days that the apartment is uninhabited on average. In Hamburg, the vacancy does not cost the landlords quite as dearly: At 582 €, the Hanseatic city ranks second. Berlin follows with the lowest loss for an empty apartment (524 €).
In Berlin-Grunewald, the tenant-free time causes costs of 1,465 € on average for the owners. An apartment here stands empty for around a month. Landlords in Alt-Treptow in Berlin make significantly less losses (around 146 €), as the apartments here are on the market for a significantly shorter time (6 days) and are on average cheaper (630 €).
Screening the new tenants requires patience, especially in Berlin. In addition to the “lost” rental income, the search for new tenants can also cost time, money and nerves. In particular, communication with prospective tenants, carrying out inspections and the final handover of the apartment cause effort in Germany’s metropolises – no wonder with over 100 prospective tenants per rental property.
In Berlin, private owners have to be particularly patient. With an average of around 450 contact requests and around 140 applicants, the screening and viewing process in the capital takes the longest. In Munich this process is much faster with an average of 135 contact requests and around 40 applicants. Hamburg residents are likely to be the fastest with processing around 60 contact inquiries and around 30 applicants.
In addition to the time required, advertising your own apartment is also associated with costs. Since apartments in Berlin, Hamburg and Munich are available for around 20 days on average between two tenants, landlords should post their advertisements online for at least one month. On average, landlords have to reckon with costs of around 100 € in one of the common portals (Immoscout, Immowelt or Ebay classifieds).
Renovation costs vary by up to 1,200 €, according to Home. Owners also have to take into account the costs of a renovation. Although some cosmetic repairs can be contractually passed on to the moving tenants of an apartment, maintenance costs are regularly incurred. Owners should repair signs of wear and tear that have arisen through years of use in order to maintain the value and condition of the apartment. In Germany’s major cities, landlords can expect an average of around 2,500 € for a professional renovation.
Here, the highest costs fall on the districts with the largest average living space. The renovation of a condominium costs the most at around 3,325 € in the Grunewald district. In Berlin-Gesundbrunnen (around 2,100 €), on the other hand, you pay significantly less due to smaller apartments.
The corona pandemic is far from over. This is especially true if you do not look at it from a purely medical point of view, but also from the perspective of the social and economic consequences. The virus divides the opinions of experts: on the one hand those who warn of the dangers of the virus and are concerned that not enough is being done to combat the spread of the virus, on the other hand those who warn of excessive measures and see the many implications that are not medical but societal, social and economic.
Most people cannot call themselves experts on any of the questions raised. The majority are not medical professionals, sociologists, economists or whatever expertise is still needed to assess the various consequences of both the virus and the measures taken. Those who cannot judge for themselves have to rely on the judgment of others. That requires trust. It is particularly about trusting the decisions of others – politicians, doctors, entrepreneurs and many others who are responsible for their fellow human beings.
The operators of social media are increasingly aware of their responsibility. For example, LinkedIn presents a paper entitled “Trust in a Time of Uncertainty“. It addresses the partnership between companies and their customers and business partners. “Trust is of the utmost importance in uncertain times,” argue the social media experts at LinkedIn.
The Edelman Trust Barometer 2020 shows that despite a strong global economy and also at times of full employment, none of the four social institutions – government, companies, non-governmental organizations (NGOs) and the media – are trusted anymore. The cause of this paradox lies in people’s fears of the future and their role in it. This is a wake-up call for these institutions to find new ways to effectively build trust: to reconcile competence with ethical behavior. Social credit ratings could play a role here. Edelman is based on 34,000 surveys in 28 markets worldwide.
In most countries, confidence was fueled by economic growth. This continues in Asia and the Middle East, but not in developed markets, where income inequality is the more important factor influencing confidence levels today. The majority of respondents here do not believe they will be better off in five years’ time, and more than half of those surveyed around the world believe that capitalism in its current form is doing more harm than good to the world.
Inequality is no longer seen as a gratifying result of freedom, but as a malfunction of capitalism. In this way, no longer state interventions and privileges, but capitalism are made responsible. The injustice of state intervention is neither recognized nor understood. The privileges based on state coercion force competitors out of the market who do not have access to those who know how to privilege certain organizations and companies through regulation and create competitive advantages. In practice, only large or highly profitable companies can afford to actively influence legislation.
Capitalism only thrives on the basis of free decisions by as many people as possible. The freedom to decide about one’s own work results and to weigh between consumption and investment leads to the optimal allocation of resources in capitalism. Edelman shows how far the population in developed countries is now from an elementary understanding of the connection between freedom and capitalism.
According to Edelman, the result is a world of two different trust realities. The informed public – wealthier, educated, and frequent consumers of news – trust any institution far more than the general public. In most markets, less than half of the masses trust their institutions to do the right thing.
In the 2020 Edelman Trust Barometer, the Trust Index is an average of the percent trust in NGOs, corporations, government and the media. NGOs, companies, government and the media enjoy the greatest trust in the world among the people of the People’s Republic of China. In the overall population of China, trust increased in 2020 compared to the previous year (from 79% to 82%). The opposite is true in countries such as the USA (from 49% to 47%) or the United Kingdom (from 43% to 42%).
These results can no longer be explained solely with restrictions on the freedom of the press and freedom of expression in the People’s Republic of China. Because of the large population, many Chinese families have a wide network of contacts around the world. The Chinese are among the people who love to travel. The economic rise allows millions of Chinese to travel to all countries in the world. In Germany, too, travel opportunities for the Chinese were not restricted by the Chinese government, but rather by a restrictive German visa policy. The level of knowledge of educated Chinese about the conditions in Germany is much better than that of Germans in China. China’s leading position in terms of popular trust in government, businesses and organizations therefore requires further research.
Trust is one dimension of a company’s reputation. This reputation has been systematically measured in many pilot projects in China since 2014 and combined in ratings. After initial mistakes, the corona crisis brought the Chinese leadership, among other things. therefore faster under control, as it relied on help from companies and organizations that have good ratings. The crisis is not only about financial stability, but also about the trustworthiness of socially responsible behavior. Therefore, social credit ratings were used to select well-reputed companies. More on this and on many other aspects of social credit ratings in the Springer-Verlag book.
The German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) provides some insights into what kind of data is used to establish a bank management board member’s reputation rating in its Guidance Notice on management board members. This is pursuant to the German Banking Act (Kreditwesengesetz – KWG), the German Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz – ZAG) and the German Capital Investment Code (Kapitalanlagegesetzbuch – KAGB).
On the form “Details of reputation, available time and additional mandates“, the management board member has to issue a personally signed and dated declaration providing information on any criminal proceedings and proceedings for administrative offences, decisions under trade law and insolvency or enforcement proceedings. The declaration need not include previously pending criminal proceedings that were terminated for lack of sufficient evidence to support the suspicion of a criminal offence. The same is true in the event that the proceedings were terminated because of a procedural bar.
The declaration need not include previously pending criminal proceedings which resulted in an acquittal or by virtue of which an entry in the Federal Central Criminal Register (Bundeszentralregister – BZR) was deleted or cancelled, or that are not required to be disclosed according to section 53 of the German Federal Central Register Act (Bundeszentralregistergesetz – BZRG).
Section 53 of the Act on the Central Criminal Register and the Educative Measures Register determines convicted person’s duty of disclosure: Convicted persons may refer to themselves as having no previous convictions and need not disclose the facts on which a conviction was based if the conviction does not have to be included in the certificate of good conduct or only in a certificate of good conduct in accordance with section 32 (3) or (4) BZR or is to be deleted. Insofar as courts or authorities have a right to the unrestricted disclosure of information, convicted persons may derive no rights from subsection (1) no. 1 vis-à-vis them if they are instructed about this fact.
Entries which must be deleted from the Central Trade and Industry Register under section 153 of the German Industrial Code (Gewerbeordnung – GewO) need not be mentioned. Section 153 determines that certain entries have to be deleted after a period of time of three years if the amount of the fine does not exceed 300 euros or five years in the other cases. If the register contains several entries, the deletion of an entry is only permissible if the period has expired for all entries. An entry to be deleted will be removed from the register one year after the requirements for the deletion have been met. During this time, no information may be given about the entry. If the entry in the register has been deleted or if it is to be deleted, the administrative offense and the fine decision may no longer be used to the detriment of the person concerned. This does not apply if the person concerned applies for admission to a trade or other economic enterprise, if the admission would otherwise lead to a considerable risk to the general public, or if the person concerned applies for the lifting of a business or other economic enterprise that prohibits the exercise of the trade Decision requested.
According to these stipulations, entries which must be deleted from the Central Trade and Industry Register under section 153 GewO need not be mentioned. On the other hand, criminal proceedings terminated under sections 153 and 153a of the German Code of Criminal Procedure (Strafprozessordnung – StPO) have to be indicated.
A termination under these provisions will not eliminate the assumption of innocence under criminal law; however, irrespective of this the circumstances of the case may give rise to indications for a lack of reputation, particularly in case of proceedings associated with punishable violations of relevant supervisory law, property- or insolvency-related criminal offences or tax offences.
Similar situations in other jurisdictions also have to be indicated. In case of doubt, the relevant division of BaFin should be contacted. These details have to be complete and accurate. In the case of any notifiable proceedings, copies of the rulings, decisions, sanctions, notices or other relevant documents have to be appended. BaFin reserves the right to obtain further information from the competent authorities, where necessary
For an assessment of possible conflicts of interest, on the form “Details of reputation, available time and additional mandates” the management board member must also declare any familial relationships with members of the management and the members of the administrative or supervisory body, both for the notifying undertaking and for its parent undertaking or subsidiary. If no details are provided on the form, this will be deemed a statement of “nil”.
On the form “Details of reputation, available time and additional mandates”, business relationships which could result in a certain degree of commercial dependence on the notifying undertaking have to be indicated as follows: Management board member, undertaking which is managed by the management board member, close relatives of the management board member = spouses, registered life partners, partners in a long-term relationship, children, parents, other relatives who belong to the household of the member. The relationships to the notifying undertaking, parent undertaking of the notifying undertaking and subsidiary of the notifying undertaking have to be disclosed. The nature of this relationship and the manner in which it is conducted have to be described. If no details are provided on the form, this will be deemed a statement of “nil”.
Under the umbrella of the Auditing Association of German Banks, GBB-Rating Gesellschaft für Bonitätsbeurteil mbH (hereinafter referred to as “GBB-Rating”) provides long-term credit ratings of leasing companies. GBB-Rating has published criteria for the rating of leasing companies in German on its website. Unfortunately there was (August 23, 2020) no English translation. In the following are summarized some of their criteria for rating leasing companies. Please do not confuse the representation with an official translation. The methodology is reported here in extracts. The rating agencies supervised by ESMA are obliged to disclose their methodologies, but not necessarily in English.
Ratings are based on an analysis and evaluation of essential quantitative and qualitative aspects of the financial and business profile of each leasing company. This is done by means of a system of indicators and criteria. The rating result is condensed into 22 classes (AAA to D) and expanded to include a rating outlook.
The rating outlook – positive, stable, negative and indefinite – is an early indicator of the direction in which a rating is likely to develop within the next 12 to 24 months. The rating outlook goes beyond the 12-month statement of the rating class, as it shows the development expected within the next 24 months based on the information available.
The focus of the rating process is the determination of an overall value (point value process) as a creditworthiness indicator that determines the allocation to the corresponding class. This results from weighted point contributions from the aggregated parameters financial profile and business profile. The procedure is basically geared towards assessing legally independent companies. Adjustments can be made to take appropriate account of business, legal or other particularities. GBB-Rating distinguishes between main criteria and characteristics. Analysis, assessment and evaluation of the key figures and criteria are carried out on the basis of the financial and business profile, taking into account defined internal rules and procedures. Intermediate scores arising from the analysis of the financial and business profiles are finally weighted and aggregated to obtain an overall score. Given the forward-looking nature of the business profile, it carries greater weight in the rating result.
The financial profile is assessed in a quantitative analysis of the annual financial statements based on indicators of the earnings position and capital position. In view of the very limited information furnished by the annual financial statements of leasing companies, the analysis also gives consideration to intrinsic value. Depending on the timing of the rating, current interim figures are analyzed as well.
The key figure system of GBB-Rating is based on the two essential aspects of the financial strength of a company – sustainable profitability and the substance for covering risks. A detailed rating manual supports the analysts in evaluating the financial data. In addition to taking certified figures from the annual financial statements into account in the key figure system, quarterly figures, budget figures and figures from internal reporting are included in the assessment of the financial profile. Because of the significantly limited informative value of the annual financial statements for leasing companies, the analysis must supplement them with the net asset value calculation according to the scheme of the Bundesverband Deutscher Leasing-Unternehmen e.V. (BDL, the Federal Association of German Leasing Companies) in order to record the economic equity and adequately depict the profit or loss for the period. This way the asynchronous expense and income trends typical in the leasing industry can be assessed, despite the strict periodization requirement according to the HGB principles.
The earnings situation is represented by seven key figures. In addition to gross and net profitability, these include the return on operating performance and cost (coverage) ratios. The key figures are translated into point values using individual transformation curves (polynomials). The transformed point values are subject to a specific weighting and are therefore included in the evaluation of the earnings situation to different degrees. It is not known how exactly the polynomials are calculated in GBB-Rating.
In the case of gross profitability, the return as the sum of the gross profit and the change in net asset value is compared with the risk potential in the form of the adjusted total assets. The gross profit is the result of the sales revenue plus the result from the sale of rental assets less all material and leasing expenses (including refinancing interest). In order for a result that is consistent with the period to be determined, the change in the net asset value must be added before administrative and risk costs (gross net asset value), because these costs do not reduce the gross profit. In the denominator, the main correction items of the balance sheet total are all items that prove the passing on of counterparty risks, especially the deferred income from non-recourse forfaiting (minus a margin for the remaining verity risk) and special rental payments. Forfaiting in the double-decker model, however, is not taken into account as a deduction, since the economic risk remains with the leasing company.
In the case of net profitability, the sum of the ordinary overall result and the change in the net asset value is compared with the risk potential in the form of the adjusted balance sheet total. The ordinary overall result is the sustainable overall result before taxes, adjusted for extraordinary earnings components, including the investment result. In order for a result that is consistent and consistent with the period to be determined, the change in the intrinsic value after administration and risk costs (net intrinsic value) must be added. In the denominator, the main correction items of the balance sheet total are all items that prove the passing on of counterparty risks, especially the deferred income from non-recourse forfaiting (minus a margin for the remaining verity risk) and special rental payments. Forfaiting in the double-decker model, however, is not taken into account as a deduction, since the economic risk remains with the leasing company. The operating performance return is compared to the sum of the ordinary operating result and the change in the net asset value of the operating performance. The ordinary operating result is the sustainable operating result before taxes adjusted for extraordinary earnings components. In order for a result that is consistent and consistent with the period to be determined, the change in the net asset value after administration and risk costs (net asset value) must be added. The operating performance is the result of the sales revenue plus the result from the sale of leased assets less refinancing interest.
The necessary amount of gross income is determined by the performance efficiency (operating costs) and the company’s willingness to take risks (risk costs). Both cost blocks are set in relation to the operating performance (operating and risk cost ratio) or to the value added as the sum of gross profit and change in the (gross) asset value before administration and risk costs (cost and risk-income ratio) and can therefore suit different business structures depict.
The capital ratios are represented by three key figures. These include two informational key figures and a rating-relevant figure. The key figures are translated into point values using individual transformation curves (polynomials). The leasing company’s own liability is assessed using the modified equity ratio, which combines the equity and forfaiting ratio. Equity is set in relation to the company’s risk potential. The adjusted liability capital is the by non-assessable assets such as outstanding deposits adjusted equity. Without the equity capital already fully taken into account, only 50% of the net asset value is included in order to ensure that the taxed equity capital is treated equally with the untaxed net asset value. In the denominator, the main correction items of the balance sheet total are all items that prove the passing on of counterparty risks, especially the deferred income from non-recourse forfaiting (minus a margin for the remaining verity risk) and special rental payments. Forfaiting in the double-decker model, on the other hand, is not considered as a deduction, since the economic risk remains with the leasing company.
The development of the sustainable earnings situation, the sustainable capital ratios, the net asset value calculation as well as the particularities of the accounting can be assessed in the criterion “further aspects of the financial profile”. In addition to taking certified figures from the annual financial statements into account in the key figure system, quarterly figures, budget figures and figures from internal reporting are included. In order to assess a sustainable earnings situation, there is an expanded consideration of earnings factors, taking into account current developments and findings. With the aim of adequately reflecting the earnings position at the time of the rating and including deviations from the sustainable trend in business development in the rating result, the sustainable earnings position is supplemented by the analysis of current interim figures and budget figures. Changes in capital resources or structure during the year can be taken into account. Because of the significantly limited informative value of the annual financial statements for leasing companies, the analysis must supplement them with the net asset value calculation according to the BDL scheme in order to record the economic equity and adequately depict the profit or loss for the period.
The assessment of the business profile is based on an analysis of primarily qualitative and future-oriented external and internal influencing factors. Supporting key figures enable a plausibility check of the analyzes and evaluations. The assessment features are integrated according to a specified standard, which can be adapted to the specifics of the business model. In this way, the necessary objectivity and, at the same time, the necessary flexibility to be able to adequately take into account specific features are guaranteed.
The business profile is evaluated by analyzing chiefly qualitative and forward-looking external and internal influencing factors. The main criteria are market factors, organizational aspects and the risk profile. To facilitate an objective assessment, these criteria are subdivided into individual attributes. In particular when the business profile is being examined, the particularities of the individual leasing company are assessed, such as its asset portfolio and contract structures.
The business profile of the leasing rating method distinguishes the said three main criteria market, organization and risk profile. Each of these three main criteria is divided into assessment features and individual criteria. The criteria are based on fixed assessment scales. The individual assessment via the assessment scale is transformed into a point value. Only when the leading analyst and the second analyst have analyzed and assessed or checked all the criteria does the weighted point values result in a decision-making overall “business profile” value. Descriptions, procedures and framework specifications for evaluation are available for all criteria in a detailed manual. The manual is subjected to a detailed check once a year to ensure that it is complete and up to date. The leading analyst uses this manual as a guide. Deviations from the requirements can only be made in justified exceptional cases after consultation with the following rating bodies. The specifications in the manual are used by the second analyst in the “Data & Controlling” department to check the plausibility of the evaluations.
The main criterion “market” is geared towards a medium to long-term time horizon. As part of an analysis of the market attractiveness, the market or markets in which the leasing company operates are analyzed (macroeconomic view). In addition to considerations of the size of the individual markets, aspects of market growth and profitability, which are determined for example by factors such as the intensity of competition, customer structures, market entry barriers, providers or substitutes, are taken into account in the assessment. Exogenous factors such as the economic development or changes in legal and regulatory provisions or the development of case law on special topics are of no insignificant importance. In addition to the leasing companies’ own statements, research by GBB-Rating is included in the assessments. In the course of a microeconomic consideration, aspects of the individual competitive position are analyzed. In this context, aspects of the market position are included in the assessment as well as the structure and scope of the range of products and services. Another important dimension is the sales policy and the associated sales channels used. A harmonious focus on the market, taking into account the available resources, an acceptable risk appetite and the specific strategic positioning (e.g. cost leadership, quality leadership, niche providers) are essential factors for a long-term successful competitive position. The strategic process can be seen as a direct bridge between the market and the organization. Its consideration includes the company’s internal processes that were set up for strategy development, implementation and monitoring.
The main criterion “organization” is based on a generally medium-term time horizon. As part of the considerations on more general criteria of corporate management, aspects such as the design of the organizational structure and personnel structure and policy are analyzed. The composition e.g. B. the supervisory body is taken into account as well as existing succession plans or potential or actual personnel dependencies or bottlenecks. The areas of controlling and planning as well as the design of accounting and IT are also examined. As part of the analysis of specific corporate management criteria, the design of the internal control systems is subjected to an assessment. The evaluation and analysis is based on the requirements of the current minimum regulatory requirements, particularly in terms of risk management. In addition to address risk management, z. B. the design and functionality of the internal audit as well as the concept for determining the risk-bearing capacity are considered.
The main criterion “risk profile” plays a crucial role when leasing companies are being rated. When the risk profile is being assessed, an inventory of all the credit, market and operational risks is produced. The experience accumulated by GBB-Rating indicates that the most critical risk types are those relating to counterparties, assets and interest rate changes. Following changes to the tax depreciation rules, accounting risks (e.g. loss-free measurement of leasing assets) are also gaining in importance.
The risk profile criterion is basically geared towards a rather short to medium-term time horizon. The risk profile is of paramount importance. When assessing the risk situation, an inventory of all credit, market and operational risks is carried out. GBB-Rating’s experience shows that counterparty, property and interest rate risks are usually of the greatest importance. Depending on the tax depreciation conditions, balance sheet risks (e.g. loss-free valuation of leased assets) also play a major role. In addition to assessing the risk situation, the analyzes of the risk profile also include a consideration of the generation of (liable) capital in terms of capital procurement potential (e.g. direct access to the capital market, retention policy) and the potential for support from the shareholder (s).
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The rating result consists of the assignment to a rating class, the justification of the rating and the rating outlook. A rating class reflects the condensed credit rating on the GBB-Rating rating scale; it generally covers a forecast period of 12 months. The findings of the analysis with regard to the financial and business profile are condensed by the analysts into a proposal for the rating result, which is the international known notation (22 rating classes from AAA to D). In the justification for the rating, essential rating-sensitive factors or drivers are shown, which can influence the rating result positively or negatively in the medium term. The drivers of the rating result are analyzed and presented as part of a consideration of the essential areas and criteria with regard to their sensitivity to the rating result.
Credit ratings play an important role for airports and their operators, since in most cases the capital requirements for airports can only be met when bonds are issued. Ratings are used to assess airport liabilities both when issuing bonds and when trading bonds.
The rating system applies both to independent airports and to companies with several airports, which are usually in full operation with an active commercial service. It is important to have a sufficiently long company history that allows conclusions to be drawn about the management.
The airport criteria apply to both issuers and certain borrowings with a broad revenue pledge, for example, if the entire operating income of the airport company serves as collateral. Debts that can be repaid from limited sources of income such as rental contracts and independent project debts for fuel supply, rental car and cargo handling facilities are also subject to credit ratings.
Both new ratings and the monitoring of existing ratings are special cases of ratings for debts from infrastructure and project financing. Risks and limitations of the methodology, which are common to all infrastructure and project financing debts not discussed here, are therefore considered separately.
Qualitative guidelines were developed for the rating of airports, which are relevant for the assessment of project risks. The relative impact of qualitative and quantitative factors varies between companies, as there can be large differences between airports, not only in terms of technology, but also economically.
While airport analysis includes taking into account risks common to all infrastructure and project finance debt, earnings risk, as a general guideline, has the most direct impact on airport ratings. According to the “weakest link theory”, the weakest link can result in its stronger analytical weight.
The most important assessment factors for airports are the earnings risk and the volume: This takes into account the role of the airport as well as the socio-economic and demographic basis of the surrounding region and, if applicable, the exposure to competing alternatives, the breadth and variety of products and services offered by airlines at the airport influence.
In order to analyze the sales risk, passenger and freight volumes and prices and price developments are examined. The generation of revenue or cash flow is taken into account in accordance with the legal framework of the airport, including the provisions of the contractual or regulatory framework, which forms the basis for the cost recovery in the revenue generation from airlines and passengers.
The rating questions the development and renewal of the infrastructure: quality, planning, management and financing of the development and renewal of the infrastructure are taken into account.
From a purely financial perspective, the debt structure is recorded, the composition of financial instruments, security, additional leverage tests, distribution limits and financial triggers. The financial profile reflects the assessment of the financial and operating metrics on a historical and forecast basis, including sensitivity analysis, and the composition of the financial instruments, examined by additional leverage tests, distribution limits and financial triggers.
Across the entire airport portfolio in the world, ratings generally range from the lower end of the “AA” category to the “BB” category. In countries with a high country risk, the country rating may set an upper limit. The entire rating range is broad, but the vast majority fall into the investment grade categories “A” or “BBB”. In most countries, the operation of airports cannot simply be stopped without fear of consequences for the country rating. The ratings for states and airports are therefore to a certain extent interdependent.
Airports generally have a higher leverage than typical business units and deal with business partners with low credit ratings from “investment grade” to “speculation”. As is so often the case with infrastructure investments, their business is typically geographically concentrated and may be subject to jurisdictional issues or legal issues that may limit or support the underlying loan.
Because of these risks, it is unlikely that an airport can ever be rated in the highest rating categories. The current corona crisis has made it particularly clear for airports how a virus can practically change the sales outlook overnight.
However, there are several reasons why most airports worldwide remain financially sound and despite these risks have ratings in the “investment grade” categories. In general, competition is more restricted because the capital-intensive nature of airports in connection with the regulatory hurdles of a public supply industry creates strong entry barriers.
These entry barriers include the cost of land acquisition and airspace needs, significant environmental barriers and the resistance of the population affected by land acquisition and noise. In addition, airports generally operate on a cost recovery model that can help keep cash flow relatively stable. While the aerospace industry continues to go through profitable and unprofitable cycles, airports have a strong repayment history, so the rating assumes that this will continue.
Stock instruments issued or to be issued and / or traded on certain stock markets may be the subject of ratings. Stock ratings reflect the risks associated with the creditworthiness of the issuer and the stock market liquidity of an instrument. However, they do not address the risk of loss associated with price changes and other market conditions, nor do they consider the reasonableness of prices for their market value. Ratings assigned at national level cannot be compared across borders and are assigned using national rating scales.
Such equity ratings are usually the result of regulatory intervention by the state to prevent investors and issuers from being harmed by malpractice on the stock exchanges. The requirement to issue equity ratings is therefore to be understood in some states as a reaction to regulatory requirements. To the extent that such requirements do not currently exist or are not applicable, share ratings are based on market practice.
Financial instruments affected by equity ratings include, but are not limited to, common shares issued by financial and non-financial companies. The equity rating method does not apply to shares issued outside of a public offer by private funds or other investment instruments, or to preference shares, as these are accessible through their own methodologies.
Stock ratings are about the elements to be valued as part of the stock rating process. Stock ratings are supplemented by analytical considerations regarding the issuer’s credit rating. The equity rating methodology should therefore not be viewed in isolation, but should be read in the context of the global criteria reports of ratings for financial and non-financial companies.
Share ratings are also referred to as buy, sell or hold recommendations. A strong buy recommendation can be expressed, for example, by a double plus ++ and a simple buy recommendation by a simple plus +, vice versa in sales recommendations minus – and double minus –. If the rater gives neither a recommendation to buy nor to sell, the recommendation “hold” e.g. can be expressed by a circle symbol o.
Analyst opinions expressed as buy and sell recommendations are as fast-paced as the stock market itself, as the Corona crisis recently showed: If the price of a share falls, the sell recommendation can quickly turn into a buy recommendation.
Because buy and sell recommendations depend on daily market price fluctuations, equity rating repair does not refer to the question of whether a stock is over- or undervalued.
Rating repairs therefore relate to the awarding of share ratings, which give investors an independent opinion on the creditworthiness of the issuer and the liquidity risk associated with their shares. The purpose of such stock ratings is to provide an estimate of the liquidity risk an investor takes when purchasing a particular stock security in order to measure, in a timely manner, how easy or difficult it will be to sell those instruments if the investor so decides.
The analysis includes evaluating the stock’s historical stock market behavior in relation to presence and traded volumes, as well as the relationship between the movements of the stock and the financial situation of the company and the industry in which it operates.
Creditworthiness and market liquidity risk are the most important factors in the equity rating for which evidence can be produced. At national level, equity ratings are therefore based on two types of analysis: issuer creditworthiness and market liquidity risk. The combination of these two factors leads to the determination of a company’s equity rating.
The purpose of a stock rating is not to assess the risk of default on such stocks. Shares are equity securities and they represent ownership, not just a claim. Therefore, they cannot be in default. Because stocks do not have specific payment obligations, the stock rating is about the likelihood that the issuer will continue to operate. Conceptually, equity ratings indicate that the more creditworthy an issuer is, the greater the likelihood that its shares will continue to be traded throughout the business cycle. In the current case of the bankruptcy of Wirecard, a company listed in the German stock index DAX, it would have been the task of a stock rating to signal the probability of such an event by a low rating.
Stock ratings reflect risks related to the creditworthiness of the issuer and the market liquidity of the stock. For the reasons outlined, however, they do not deal with the risk of losses associated with changes in share prices and other market conditions, nor with the adequacy of the market price of a particular security. Equity ratings are therefore notsuitable as trading signals, for example to buy and sell a stock within a few hours. Equity ratings are also not the basis for trading Contracts for Difference (CFDs). Under no circumstances does such analysis result in a recommendation to buy or sell a particular security. Share ratings are therefore not a special form of share price estimates, nor are share prices used to determine forecasts of liquidity risk.
The information required to carry out the risk analysis and assign ratings is obtained from various sources such as the issuer, industry data and other relevant sources. For the specific analysis of the liquidity of the share, the statistical data are obtained from market sources that are required to be able to calculate the relevant stock market indicators.
The analysis usually includes five years of company history and financial data. The information required to assess the creditworthiness of the issuer can be requested directly from the issuer or obtained indirectly through agencies. Once the necessary information has been collected and checked, an analysis can be carried out using a uniform method.
Forensic Rating
If criminal energy is involved – as allegedly in the case of the Wirecard company – the stock rating cannot easily detect the counterfeit. Rating agencies emphasize that the information received from the issuer or its representatives will not be reviewed or verified (again). While ratings look to the future, auditors’ attestations are there to confirm that the company’s report agrees with the facts it finds.
In order to counter fraud cases like WorldCom, Enron and now apparently also at Wirecard and to give warning signals to investors, a forensic rating is required. Forensic ratings typically deal with individual offenses, unlike criminology, which examines the basics of criminal behavior. The concept of “forensic science” – like the concept of “credit rating” – often does not meet the criteria for scientific research in the narrower sense. It is understandable that forensic ratings are predominantly carried out using methods that are well established, standardized and as undisputed as possible. Innovation and creativity must be severely restricted for reasons of comparability and fairness. The scientific principles of objectivity, reliability and validity also apply to criminal investigations. It is very important to ensure the highest possible quality standard as with every rating.
Auditing
Rating also does not replace the work of the auditor, because the auditor’s report is the overall opinion of an auditor after the audit of the annual financial statements. In it, the auditor assesses the conformity of the annual financial statements and the management report with the accounting regulations applicable to the company. An assessment is only made as to whether the situation of the company has been correctly represented, but no prognosis of the company’s creditworthiness and the liquidity of the share is given. A holistic assessment of the economic situation, which also requires a considerable degree of industry knowledge, is generally not carried out. The auditor’s report may only be issued after the material examination has been completed.
For securities without historical stock market information such as a first stock offer or with insufficient information, the analysis can practically only be based on the creditworthiness of the issuer. After approximately one year of trading and records of stock exchange transactions, equity liquidity is included in the analysis.
The issuer’s creditworthiness is expressed in its issuer default rating or its long-term national scale rating. Depending on the type of company, these are calculated according to the respective methods for non-financial – e.g. Chemical companies, technology companies) and financial companies (e.g. banks and insurance companies).
As with credit ratings, the purpose of credit analysis is to classify the likelihood that a company will meet its financial obligations (or in other words, the risk of default). The company’s operational and financial profile, its overall creditworthiness and thus the long-term rating of the issuer are good approximations of the risk of a company’s future cash generation capacity.
The equity rating includes qualitative and quantitative variables to measure the operational and financial risks of an issuer and to determine its credit profile in accordance with the concepts contained in the global rating methods for financial and non-financial companies.
As already indicated, an ex-post analysis is carried out to assess exchange liquidity, which is naturally dynamic and is based on the monitoring of certain relevant market indicators for measuring the liquidity of a share.
The world’s stock exchanges are very different. What is relevant for investors is the quality of the paper on the stock exchange where it can trade. Therefore, stock ratings are placed in the context of the country’s stock exchange. The analysis may include elements that reduce liquidity, e.g. for example, the series of a particular share that grants greater rights to another series of that security. The relative importance of the individual risk factors can vary. As a rule, indicators that indicate the low liquidity of a particular stock limit their rating to the lowest range on the scale.
The trading history of the share, the percentage of free float and the development of market capitalization and daily trading volume are factors that influence the assessment of the liquidity level of the share. The liquidity of a security is measured by the recent development of these and other stock market indicators, but essentially by the presence of the security on the market. Although the rating depends on the recent performance of the equity liquidity indicators, the track record of the indicators being assessed is critical to determining a rating.
The market presence is the main measure that is taken into account when determining market liquidity. The number of days on which an instrument has been processed in relevant amounts within the last 180 working days plays a role here. This indicator provides a measure of the number of days on which transactions relevant to a share were registered.
The number of days on which an investor would have been able to get out is important for assessing the liquidity of a share. Companies in which transactions are recorded almost every day have a high stock exchange presence, which speaks for a high level of liquidity.
Market capitalization – and thus indirectly the share price – also plays a role in the share rating, because it reflects the market value of a stock corporation at a certain point in time. The market capitalization is calculated by multiplying the share price by the number of shares. By looking at the market capitalization, there is a ranking that the companies rank according to their market size. Rapid, frequent and unilateral changes in market capitalization reflect the trend and volatility of market value over a period of time.
The free float relates to shares that are not held by majority or long-term shareholders. Free float in stock corporations means the total number of shares available for exchange trading. The higher this percentage, the more liquid the share should be. When the trading volume is recorded, the total value of the transactions in a share is taken into account.
The average daily trading volume is determined by the presence on the stock markets and the market capitalization and reflects the monetary value of the average daily transaction volume for a specific security in a specific period. The trading volume is calculated by the number of securities traded in a period multiplied by the price of each transaction. The total volume traded by an issuer is compared to the total volume traded by the entire market.
Share ratings express the “option character” of a company’s shares. According to the option price theory, the shareholder can also be modeled as a buyer of a purchase option. By paying a premium – the share price – the buyer receives the right, but not the obligation, to continue operating the company. If the value of all the assets of a company falls below the value of the creditors’ claims against the company, the shareholder does not have to replenish equity, but can leave the company to the creditors for liquidation as part of an insolvency procedure.
Since the company’s credit rating also includes the risk of default, it characterizes the option character of the share. The lower the share rating, the greater the option character of the share.
Credit risk is a function of an issuer’s probability of default and the loss given default on a specific debt instrument. For noninvestment grade corporate issuers, some rating agencies assign separate ratings for these two components of credit risk. An issuer rating is a rating agency’s assessment of the probability that an issuer will default on its debt. A recovery rating, on the other hand, considers the value of assets (or enterprise value) that would be available to an investor for a specific debt instrument, in accordance with its ranking and legal rights, at the time of an assumed emergence from a reorganization or liquidation process that might occur between, for example, six and 18 months after default.
Recovery ratings can be assigned to specific instruments for corporate non-investment-grade issuers, i.e., those issuers with a speculative grade issuer rating. They are assigned because non-investment-grade bonds have a greater likelihood of default, investors have a greater interest in the outcome of a potential default scenario and an assumed default scenario can be more reliably constructed.
Criteria do not typically apply ratings on public finance transactions or financial institutions, and also not to preferred share securities that are by definition low recovery instruments. Since commercial paper or short-term instruments have by definition shorter maturity durations and a higher reliance on liquidity considerations, commercial paper is also not eligible for recovery ratings.
While the underlying security affected by a recovery rating will have a rating trend unless its status is under review, recovery ratings themselves have no trends and are not placed under review. In most cases, a recovery rating will not be maintained for very long on a security that has downgraded to Default or Selective Default.
There are five stages in the determination of a recovery rating and final instrument rating: Determination of a path to default scenario, valuation of the issuer upon emergence from default, determination of claims against the defaulted entity, distribution of value from the defaulted entity and assignment of a recovery rating and notching of the issuer rating to determine a final instrument rating.
A recovery rating necessarily assumes that a default will occur; the actual probability of default is addressed solely by the issuer rating. It is important to consider the distinction between companies that have issuer ratings in the B-category or lower and companies with issuer ratings in the BB range, since lower default risk makes it more difficult to construct a scenario for both a path to default and asset or enterprise values at default.
For BB-range issuers, a rating agency might be more restrictive in terms of the degree of notching uplift it will permit between the issuer rating and the recovery rating, so as to limit the possibility of non-investment-grade issuers having instruments rated well into investment-grade territory. The final instrument rating, determined by notching up or down from the issuer rating in accordance with the recovery rating essentially blends the two elements of credit risk — probability of default and loss given default — giving investors an additional measure of the expected performance of a non-investment-grade bond.
Credit risk is a function of an issuer’s probability of default and the loss given default on a specific debt instrument. For noninvestment grade corporate issuers, some rating agencies assign separate ratings for these two components of credit risk. An issuer rating is a rating agency’s assessment of the probability that an issuer will default on its debt. A recovery rating, on the other hand, considers the value of assets (or enterprise value) that would be available to an investor for a specific debt instrument, in accordance with its ranking and legal rights, at the time of an assumed emergence from a reorganization or liquidation process that might occur between, for example, six and 18 months after default.
Recovery ratings can be assigned to specific instruments for corporate non-investment-grade issuers, i.e., those issuers with a speculative grade issuer rating. They are assigned because non-investment-grade bonds have a greater likelihood of default, investors have a greater interest in the outcome of a potential default scenario and an assumed default scenario can be more reliably constructed.
Criteria do not typically apply ratings on public finance transactions or financial institutions, and also not to preferred share securities that are by definition low recovery instruments. Since commercial paper or short-term instruments have by definition shorter maturity durations and a higher reliance on liquidity considerations, commercial paper is also not eligible for recovery ratings.
While the underlying security affected by a recovery rating will have a rating trend unless its status is under review, recovery ratings themselves have no trends and are not placed under review. In most cases, a recovery rating will not be maintained for very long on a security that has downgraded to Default or Selective Default.
There are five stages in the determination of a recovery rating and final instrument rating: Determination of a path to default scenario, valuation of the issuer upon emergence from default, determination of claims against the defaulted entity, distribution of value from the defaulted entity and assignment of a recovery rating and notching of the issuer rating to determine a final instrument rating.
A recovery rating necessarily assumes that a default will occur; the actual probability of default is addressed solely by the issuer rating. It is important to consider the distinction between companies that have issuer ratings in the B-category or lower and companies with issuer ratings in the BB range, since lower default risk makes it more difficult to construct a scenario for both a path to default and asset or enterprise values at default.
For BB-range issuers, a rating agency might be more restrictive in terms of the degree of notching uplift it will permit between the issuer rating and the recovery rating, so as to limit the possibility of non-investment-grade issuers having instruments rated well into investment-grade territory. The final instrument rating, determined by notching up or down from the issuer rating in accordance with the recovery rating essentially blends the two elements of credit risk — probability of default and loss given default — giving investors an additional measure of the expected performance of a non-investment-grade bond.
What constitutes future-oriented residential areas? The answer is complex and can not be answered in a general or even complete manner for all residential real estate between Norderney and Berchtesgaden. A recent study searched for similarities that characterize future-proof and long-term profitable housing, and examines these success criteria more closely.
Ten macro-location and nine micro-location criteria with a particularly large impact on the future viability of residential real estate were identified. These macro and micro factors were evaluated.
This scoring does not just consider the macro criteria that determine the future viability of an entire city. For the first time, the scoring combines these insights with microcriteria that refer to a single location, a self-contained neighborhood or borough. The particular challenge lies in the selection of the set of criteria on the micro level. Living is very individual, the requirements of people vary depending on their life model, age and preferences.
The quantitative basis for the analysis is provided by the scoring, which combines macro and micro aspects using a standardized, specially developed tool for the initial assessment of residential areas. For the analysis, data from 30 German cities (“macro locations”) and 30 city districts according to KGS 12 (“micro locations”) were collected, examined and evaluated. In doing so, attention was paid to a balanced geographical distribution and the inclusion of residential locations from all clusters of cities in order to achieve the most realistic possible representation of the overall market. With regard to residential locations, the approach distinguishes between macro-location and micro-location criteria.
Some of the criteria show an inventory, such as security or affordability. Others are strongly forward-looking, such as forecasts of population growth and sustainable housing demand. Each of the criteria is then evaluated by means of defined value classes on a scale of one to five, one representing the lowest value and five the highest value.
The individual results are aggregated and add up to a score for the selected macro and micro-situation. The microvariable “Attractiveness of the residential area” is overweighted in the model because it consists of different subcriteria. All other variables are included equally in the scoring.
The study may offer helpful pointers and landmarks. From the perspective of long-term oriented investors, approaches for own investment strategies can be derived.
“There is no recognizable path ahead of us, but only behind us,” writes Gabi Steiner in her book “From Person to Person – Earning a Stable Income From Referral Marketing“. Any rating of the future prospects of a business model can only be based on the information that humanity has gathered to date. “Successful people,” Gabi Steiner points out, “act on the basis of verified information. Unsuccessful people act on the basis of unchecked prejudices.”
“It makes me sad when I hear that someone reduces this opportunity to earning money,” writes Gabi Steiner. Rather, she is concerned with ideal values, such as a high degree of freedom and independence, and a way to “make and maintain friendships, get to know other people, customs and, above all, the luxury of ‘time’ for health, family, friends and to have hobbies. “
By referral marketing, she understands “a simple concept to bring products directly from the manufacturer to the consumer, and money that is typically spent on conventional distribution and advertising sales methods is instead paid to those who bring others to the product for their own use.”
With entertaining examples, Gabi Steiner makes it clear that referral marketing is not about sales. Selling is much more the consequence of buying – when it comes to products that are suitable for everyone, this is okay for everybody.
“Network marketing works best,” says Gabi Steiner, quoting Richard Poe, “if you just keep working face-to-face and heart-to-heart with people on a daily basis. The only glue that keeps a network together for a long time consists of friendship, loyalty and personal relationships. ” The perspectives of computerized distribution channels are therefore limited.
The German pension system of the statutory pension insurance has now more in common with an illegal pyramid scheme than any serious offer in referral marketing. “A pyramid scheme in the unfair sense is given,” says Michael Strachowitz, a well-known network coach, “if the income of the already in the system members from the entrance fees of newly added members is denied, with the result that the system collapses immediately when no new members join. ” A serious system rules out this case.
Gabi Steiner shares in her book with the reader her love for referral marketing, “because it gives every person, regardless of age, gender, occupation, origin, the chance to be successful.” Machines replace muscles, computer brain, exclusively in humans remain emotions. In order to identify successful entrepreneurs – as Gabi Steiner explains using a circuit diagram – the question of the reason for their actions must be asked: “Anyone who has no reason to do something has a reason to do nothing!”
Emotions are transported with stories. Therefore, In Gabi Steiner’s concept stories play a big role, especially autobiographies. The book gives an insight into the “target collage”, as she calls it, of a successful entrepreneur. By giving a dream a date, it becomes a goal. Thinking and acting are components of success, so that there is no failure, but only success that did not occur early enough.
Gabi Steiner writes her book at a time when many people have forgotten to ask about the needs of their fellow human beings. People are already accustomed too much to adopt algorithms on the Internet, to recognize needs and to coat the visitors of websites with advertising. Her motto, on the other hand, is: “Find out what your counterpart wants and help him achieve that.”
Principles and values play a major role. Gabi Steiner: “Paths arise when walking!” Anyone who understands Gaby Steiner’s book has not only learned a wealth of concepts and ideas and gained business insights, but has also acquired criteria for assessing a successful startup, because at its core, it is always about relationships between people. Successful entrepreneurs are people who, as multipliers, move many people – movement in the literal as well as figurative sense. “It’s not enough for something that it merely works, it’s important that it duplicates!”
Gabi Steiner brings to paper an astonishing amount of know-how in referral marketing. The reader may expect color and an entertaining reading that does not tire of scientific footnote apparatuses, but honors the ideas of profiled experts through fair quoting. With original terms such as “vaccination and snails technology”, Gabi Steiner makes it easy for readers to remember the many tools presented in the book. The book is recommended as an introduction and guide to referral marketing.
“There is no recognizable path ahead of us, but only behind us,” writes Gabi Steiner in her book “From Person to Person – Earning a Stable Income From Referral Marketing“. Any rating of the future prospects of a business model can only be based on the information that humanity has gathered to date. “Successful people,” Gabi Steiner points out, “act on the basis of verified information. Unsuccessful people act on the basis of unchecked prejudices.”
Is referral marketing a way to make money?
“It makes me sad when I hear that someone reduces this opportunity to earning money,” writes Gabi Steiner. Rather, she is concerned with ideal values, such as a high degree of freedom and independence, and a way to “make and maintain friendships, get to know other people, customs and, above all, the luxury of ‘time’ for health, family, friends and to have hobbies. “
By referral marketing, she understands “a simple concept to bring products directly from the manufacturer to the consumer, and money that is typically spent on conventional distribution and advertising sales methods is instead paid to those who bring others to the product for their own use.”
With entertaining examples, Gabi Steiner makes it clear that referral marketing is not about sales. Selling is much more the consequence of buying – when it comes to products that are suitable for everyone, this is okay for everybody.
“Network marketing works best,” says Gabi Steiner, quoting Richard Poe, “if you just keep working face-to-face and heart-to-heart with people on a daily basis. The only glue that keeps a network together for a long time consists of friendship, loyalty and personal relationships. ” The perspectives of computerized distribution channels are therefore limited.
The German pension system of the statutory pension insurance has now more in common with an illegal pyramid scheme than any serious offer in referral marketing. “A pyramid scheme in the unfair sense is given,” says Michael Strachowitz, a well-known network coach, “if the income of the already in the system members from the entrance fees of newly added members is denied, with the result that the system collapses immediately when no new members join. ” A serious system rules out this case.
Gabi Steiner shares in her book with the reader her love for referral marketing, “because it gives every person, regardless of age, gender, occupation, origin, the chance to be successful.” Machines replace muscles, computer brain, exclusively in humans remain emotions. In order to identify successful entrepreneurs – as Gabi Steiner explains using a circuit diagram – the question of the reason for their actions must be asked: “Anyone who has no reason to do something has a reason to do nothing!”
Emotions are transported with stories. Therefore, In Gabi Steiner’s concept stories play a big role, especially autobiographies. The book gives an insight into the “target collage”, as she calls it, of a successful entrepreneur. By giving a dream a date, it becomes a goal. Thinking and acting are components of success, so that there is no failure, but only success that did not occur early enough.
Gabi Steiner writes her book at a time when many people have forgotten to ask about the needs of their fellow human beings. People are already accustomed too much to adopt algorithms on the Internet, to recognize needs and to coat the visitors of websites with advertising. Her motto, on the other hand, is: “Find out what your counterpart wants and help him achieve that.”
Principles and values play a major role. Gabi Steiner: “Paths arise when walking!” Anyone who understands Gaby Steiner’s book has not only learned a wealth of concepts and ideas and gained business insights, but has also acquired criteria for assessing a successful startup, because at its core, it is always about relationships between people. Successful entrepreneurs are people who, as multipliers, move many people – movement in the literal as well as figurative sense. “It’s not enough for something that it merely works, it’s important that it duplicates!”
Gabi Steiner brings to paper an astonishing amount of know-how in referral marketing. The reader may expect color and an entertaining reading that does not tire of scientific footnote apparatuses, but honors the ideas of profiled experts through fair quoting. With original terms such as “vaccination and snails technology”, Gabi Steiner makes it easy for readers to remember the many tools presented in the book. The book is recommended as an introduction and guide to referral marketing.
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