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Ilija Batljan’s Rating Shopping Spree

Repairs

Are upgrades driven by improvements in creditworthiness or by hopping from agency to agency?

The activities of self-made millionaire Ilija Batljan are too conspicuous to be ignored in the financial markets. Ilija Batljan came to Sweden from Montenegro. He moved to Sweden in 1993 during the breakup of his native Yugoslavia and in 1996 earned a B.A. in economics at Stockholm University, later disputing in 2007. A man with a migration background, Ilija Batljan quickly made a career in politics and became mayor of Nynäshamn in 2005 and campaigned against wealth and property taxes in his Social Democratic Party of Sweden in 2010.

There is now a long list of companies in which he plays or played the role of investor, Chairman, Chief Executive Officer and/or Director:

However, the long list of mandates and investments does not suggest diversified assets and balanced risk positions. Some of the mandates are subsidiaries or small companies. His largest investments is reportedly Samhällsbyggnadsbolaget i Norden AB (SBB). According to the shareholder structure as of March 31, 2021, Ilija Batljan held (private and through company) 8.46 % of share capital and 32.54 % of votes in SBB.

Moody’s Single B Credit Rating Category

Anyone looking for information from the internally recognized credit rating agency Moody’s Investors Service on the high debts of Ilija Batljan’s numerous companies will have to go back years in their research. Moody’s Investors Service had on November 8, 2017 assigned a first-time B1(Single B One) corporate family rating to Samhällsbyggnadsbolaget i Norden AB (SBB), a Stockholm-based real estate company. controlled by CEO and founder Ph.D. Ilija Batljan. The outlook on the rating was Stable. According to Moody’s rating scale, obligations rated B (Single B) “are considered speculative and are subject to high credit risk“. Moody’s appends numerical modifiers 1, 2 and 3 to each generic rating classification from Aa through Caa.

At the time and according to Daniel Harlid, a Moody’s Assistant Vice President, Analyst and also Lead Analyst for SBB, the B1 (Single B One) rating reflected the company’s midsized property portfolio of low risk community services and residential properties in Sweden and Norway, reflecting the company’s focus on rental income from regulated markets or activities that are, in one way or another, funded by the government.

On November 8, 2017 the B1 (Single B One) corporate family rating assigned to SBB reflected all the company’s strenghts (see Moody’s):

  • high share of low-risk revenue derived from residential properties in Sweden, community service properties, as well as offices in Sweden and Norway;
  • high share of revenue generated from public tenants (over 30%);
  • diversified tenant base and property portfolio, with almost full occupancy;
  • long lease maturity profile, with an average lease length of seven years;
  • good deal-sourcing capabilities, leading to a medium-sized portfolio of SEK 22.1 billion as of the third quarter of 2017, only after 20 months since the creation of SBB; and
  • expected positive free cash flow, which will fund capital spending.

Despite all these favorable factors, it was only enough for a B1 (Single B One) rating, since the credit rating also reflected a number of challenges such as a low unencumbered asset ratio, properties located in small cities and in less liquid real estate markets than in the metropolitan area and elevated leveraged.

On April 10, 2019 Moody’s had withdrawn the corporate family rating of SBB. At the time of the of withdrawal the rating was still B1 (Single B One) and had a positive outlook. Moody’s had decided to withdraw the rating for its own business reasons: “Please refer to the Moody’s Investors Service Policy for Withdrawal of Credit Ratings, available on its website, www.moodys.com.” Ultimately, it remains in the dark what would have happened to the rating and the outlook if Moody’s had continued to assess the company. The rating history has ended.

Credit Rating Agency (CRA) - Definition of "Rating Shopping"

“Rating shopping can be understood as occurring when an issuer engages with a number of credit rating agencies with a view to selecting only those credit rating agencies that will provide the most favourable assessment for the entity or debt instrument. In choosing to appoint only those credit rating agencies that provide the most favourable assessment, risks are created for investor protection and financial stability. Specifically, risks of ratings inflation and lack of applied methodological rigour. While concerns around this practice were initially focused on structured finance ratings, recent revisions of the CRA Regulation have expanded the area of focus to the broader spectrum of entities and debt instruments assessed by CRAs.”

Source: Consultation Paper - Guidelines on Disclosure Requirements for Initial Reviews and Preliminary Ratings, European Securities and Markets Authority, May 26, 2021, ESMA33-9-412, p. 5.

S&P Global Ratings’ Triple B Rating Category

On January 15, 2018, S&P Global Ratings had SBB assigned a BB (Double B) rating with stable outlook. This was SBB’s second public rating from a leading credit rating agency and was a two step improvement over the first rating the company received in November 2017 from Moody’s.

On April 26, 2019, S&P Global Ratings announced that SBB had been assigned a BBB- (Triple B Minus) rating with stable outlook. This upgrade came after a competitor of S&P Global came into play, namely Fitch Ratings with its BB+ (Double B Plus), which superseded Moody’s B1 (Single B One).

hallway with window

On May 5, 2020, SBB reported that SBB had been informed by the Swedish Economic Crime Authority that the company’s CEO Ilija Batljan had been detained in custody on alleged violation of the Market Abuse Regulation. The company had no additional information at this stage and did not know which company or security these allegations relate to. During Ilija Batljan’s absence, SBB’s deputy CEO Krister Karlsson was acting CEO for SBB.

Although SBB had been informed that the company’s CEO had been released from custody, the credit rating agency S&P Global announced on May 8, 2020, that they were placing SBB on Credit Watch Negative due to ”at this stage, there are some uncertainties about how” the charges against the CEO ”will affect SBB’s management and operations, including deleveraging plans which may take longer than S&P previously anticipated”.

On June 10, 2020, S&P Global Ratings affirmed SBB’s “investment grade” rating BBB- (Triple B Minus) with stable outlook and removed SBB from Credit Watch Negative. That means that SBB’s new rating was from that day on BBB- (Triple B Minus) with stable outlook for ratings on the company and its senior unsecured debt.

“Thanks to SBB’s focus on deleveraging, despite its strategy to continue to expand its portfolio, we expect the company will maintain or improve its credit metrics over 2021-2022”, wrote S&P Global Ratings on March 1, 2021. “We are therefore revising our outlook on SBB to positive from stable and affirming our ‘BBB-‘ (Triple B Minus) issuer credit rating on the company. We are also affirming our ‘BBB-‘ (Triple B Minus) ratings on the senior unsecured debt and ‘BB’ (Double B) rating on the subordinated hybrid instruments.”

Fitch Ratings’ Triple B Rating Category

On May 30, 2018, there was better news for SBB, namely from Fitch Ratings by its “Long Term Issuer Default Rating”: SBB had now been rated BB (Double B) by these analysts. On April 8, 2019, there was an upgrade to BB+ (Double B Plus). A little later it went up to BBB- (Triple B Minus) on April 16, 2019. It stayed that way to this day. The credit rating for the debt level “subordinated” remained at BB (Double B).

The close temporal relationship between the end of Moody’s rating and the upgrade by Fitch Ratings is striking. It was only on April 8, 2019 that Fitch ratings upgraded to BB+ (Double B Plus), two days later Moody’s removed its rating for the company. That was good business for SBB, because according to the EU regulation on credit rating agencies and due to the recognition of Fitch Ratings, the rating of this agency has about the same legal significance as that of Moody’s.

Scope Ratings’ Triple B Rating Category

Although Ilija Batljan already had relationships with Moody’s Investors Service, S&P Global Ratings and Fitch Ratings, his choice for the credit rating of his investment company “Ilija Batljan Invest AB” falls on another, less well-known rating agency in Germany: There is a local credit rating agency in Berlin.

That credit rating agency currently operates under the name “Scope Ratings GmbH”, maintains a website on the Internet and presents itself as “the leading European provider of independent credit ratings” though with a market share of less than 1%.

The European Securities and Markets Authority (ESMA) imposed sanctions on this agency, but it is a legally registered agency according to the EU regulation on credit rating agencies. According to the regulation, the ratings of this agency thus have practically the same legal meanings as the ones of the internationally recognized credit rating agencies. In contrast to the credit ratings by the leading agencies, the ratings of “Scope Ratings” are not used by the European Central Bank for specific purposes, but – according to the rating agency’s own company news – by the central bank in Sweden, Sveriges Riksbank.

According to the decision by the Executive Board, the Riksbank may purchase bonds issued in Swedish krona by Swedish non-financial corporations. This process of money creation brings significant advantages for the privileged companies. SBB is already one of these companies.

The bonds the Riksbank may purchase must have, among other requirements, credit ratings no lower than Baa3 (Baa Three) or BBB- (Triple B Minus), from anyone of the credit rating institutes Standard & Poor’s, Moody’s, Fitch Ratings, Nordic Credit Rating or Scope Ratings, or if they have no such rating, be issued by companies with credit ratings no less than Baa3 (Baa Three) or BBB- (Triple B Minus) from the same credit rating institutes.

On May 28, 2021 Scope Ratings has assigned a first-time issuer rating of BBB- (Triple B Minus) to Ilija Batljan Invest AB. Scope Ratings has also assigned a first-time rating of BBB- (Triple B Minus) to the company’s senior unsecured debt. Even before the crisis, the Ilija Batljan Invest AB (IB Invest) reported losses, as shown in the published financial statements up to 2019. More recent figures are not yet reported here.

Ilija Batljan Invest AB’s cash flows are from recurring income from its core holding SBB i Norden and direct/indirect real estate investments. “The majority of IB Invest’s financially relevant holdings (87% of gross asset value and 78% income contribution) are publicly listed companies in well-developed markets”, says Scope Ratings GmbH in its report named “Scope assigns first-time rating of BBB-/Stable to Ilija Batljan Invest AB” and continues: “The remainder are either direct or indirect real estate holdings with decent assessed liquidity or unlisted shares in growth companies.” Scope Ratings GmbH acknowledges that the “business risk profile is somewhat held back by its limited diversification“.

Provided that the factual information from the Berlin rating agency is correct, the rating result of the Berliners is surprising against the background of the above ratings from the other agencies. Ilija Batljan Invest AB’s creditors can only be satisfied from the cash flows that the company receives from its assets. These assets mainly include the investment in SBB. However, if SBB’s subordinated liabilities are only to be found in category BB (Double B), then the payments to SBB’s shareholders must be exposed to even greater risks because they are subordinate to SBB’s creditors. The shareholders only receive residual income.

As Scope Ratings itself shows, the portfolio of Ilija Batljan Invest AB is concentrated on comparatively few exposures, which account for the largest part of the risk. Therefore, the positive diversification effects cannot be great. It is questionable whether the income from the other commitments would be sufficient to hold Ilija Batljan Invest AB’s creditors harmless in the event of a failure by SBB. Investors must therefore check whether the rating issued by Scope Ratings does not need to be repaired.

On May 17, 2021 Ilija Batljan Invest AB was requesting the approval from holders of its up to SEK 1,000,000,000 Senior Unsecured Floating Rate Notes due 2022 (ISIN: SE0013122009) to refinance the Notes in full before the Maturity Date. In order to refinance the Notes in full before the maturity date for the purpose of managing the Company’s debt maturity profile by way of adding a call option at 104.00 per cent of the nominal amount, the Company had instructed the agent, Nordic Trustee & Agency AB, to initiate a written procedure for its outstanding Notes. Not necessarily, but possibly: Such a negotiation process can also be an expression of a liquidity bottleneck or an impending insolvency, among other things.

It was the declared intention of the Ilija Batljan Invest AB "to evaluate an acquisition of a corporate rating from Scope (or similar rating agency) with a clear ambition to reach Investment Grade and to list any new Market Loan(s) issued on Nasdaq Stockholm". 

This is not just an internal announcement. Rather, the intentions were made public. It must therefore have been clear to every analyst at Scope Ratings which expectations of the issuer they have to meet. If they did not give an "investment grade" rating, the contract would go to another agency. However, since the Scope Group has never made a profit for almost two decades and the agency's analysts probably believe that the agency must break even if possible, the credit analysts are under great pressure. In addition, the analysts at Scope Ratings must have been aware that the growing circle of profit-seeking shareholders in Scope SE & Co. KGaA has developed ever higher expectations with regard to the agency's expected profits over the years.

Under the outlined conditions, it seems plausible that the cash flows to be expected from Ilija Batljan Invest AB cannot be rated at the same level as those of SBB, from which these cash flows are obtained, although in addition to those from other, smaller investments. Rather, it stands to reason that the same cash flows are leveraged multiple times here: At the level of subsidiaries and parent companies as well as at the level of the investment vehicle Ilija Batljan Invest AB. With every additional leverage and additional debt, the risk might increase, especially if there are no profits that could be distributed or transferred to reserves.

Furthermore, the question should be investigated whether the change of credit rating agencies and the rating order to a lesser-known, local rating agency from Berlin arose from the will to provide more transparency for creditors, or from the greed for better ratings for an even higher level of debt. The question of why a local rating agency on the Stockholm doorstep, namely Nordic Credit Rating, was not commissioned, which could know the Ilija Batljan’s group of companies even better, can also be investigated. Nordic Credit Rating would also have met the central bank’s requirements, Riksbank’s formal criteria.

While it became known for Greensill Bank that the chairman of the Greensill Bank‘s supervisory board was also an investor and advisory board member at the local agency in Berlin and that it helped Lex Greensill to get and maintain even an A- (Single A Minus) rating until six months before insolvency of his bank, it is not known whether Iljia Batljan is also involved in that same credit rating agency. Because of the multi-level business model of the Scope Group and the intransparent shareholder structure of Scope SE & Co. KGaA it is not known who is shareholder and at the same time beneficiary of a benevolent credit rating of the rating agency. In any case, it is known that the agency has tried to collect money through numerous road shows not only in Berlin, but also in other cities.

Who Used RATING.REPAIR in 2020?

Read, Repairs

Map of RATING©REPAIR users in 2020

We do not know whether it is mere curiosity, serves scientific research or is of commercial use; in any case, we are repeatedly asked who the users of our service RATING©REPAIR are. We are therefore providing an overview of the user structure in 2020.

We only receive this information to the extent that visitors to our website also allow cookies to be set or subscribe. We therefore have no information on who has only visited our website but not used it. Furthermore, it does not record who only reads our freely available blog posts. In addition, these are also published on Twitter, LinkedIn, Facebook and TumblR. Therefore we have many more readers than users. So we are only talking about users in a narrower sense.

The world map shows from which countries we were able to serve users with RATING©REPAIR in 2020. As expected, most of the interested parties are in Germany, where RATING EVIDENCE GmbH is based in Frankfurt am Main. The darker the color, the greater the number of users.

Click here to see a list of the countries of our RATING©REPAIR users 2020

Ranking according to the number of visitors in 2020:

Germany
China
United States
Switzerland
Romania
United Kingdom
France
Netherlands
India
Ireland
Austria
Bulgaria
Slovenia
Spain
Sweden
Italy
Belgium
Denmark
Singapore
Mexico
Canada
Hong Kong SAR China
Bonia & Herzegovina
Australia
South Africa
Turkey
Cyprus
United Arab Emirates
Norway
Pakistan
Poland
Luxembourg
Portugal
Ukraine
Banladesh
Latvia
Vietnam
Russia
Japan
Malaysia
Barbados
Czech Republic
Seychelles
Zimbabwe
South Korea
Lithuania
Nepal
Indonesia
Chile
Philippines
New Zealand
Greece
Hungary
Madagascar
American Samoa
Finland
Thailand
Israel
Nigeria
Slovakia
Taiwan
Brazil
Lebanon
Benin
Mauritius

In the first two months of 2021, we noticed that users from other countries that are not yet on this list above have joined the list now.

At the beginning of 2021, the user structure led to the following structure of our revenues, which were achieved exclusively through the sale of subscriptions:

RATING EVIDENCE GmbH generates additional sales from investments and other businesses that are not included in this chart. Due to the lifetime price guarantee and the guarantee to all subscribers not to lower prices for later subscribers, there was a slight increase in the average subscription fee over the last year. As a result, around a third is generated in Germany, a third in the countries of the European Union outside Germany and a third in countries outside the European Union.

We see a shift in user structures from month to month, depending on the topics we are dealing with. There was a clear jump in the number of users from China when our book “Social Credit Rating” was about to be published last year and announcements as well as excerpts from the articles could be put on our website.

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In 2020 we installed a translation function from Google Translate on our website, which enabled a quick translation into almost all major languages in the world with just one click of the mouse. Although we do not know exactly how often this offer was used by our users, we have abolished the translation function. Therefore, no more data is passed on to Google Translate. On the one hand, many browsers automatically offer a translation if the visited website does not appear in the language preset in the browser. On the other hand, everything indicates that our users always speak English. Anyone who deals with the responsible and efficient allocation of capital as a resource and with the rating of all asset classes around the world obviously understands enough English.

"During a medical routine check-up my doctor once gave the - for me unknown - name of an illness to me and asked me if I might be infected with this illness. I then asked the doctor what the disease name meant and what the disease was all about. The doctor replied that I had already answered his question by asking him about this disease instead of giving him an answer right away. "Anyone", he said, "who has the disease that they have been asked about definitely knows that they suffer from it and would not hesitate a second to say yes." It is similar with our services from RATING EVIDENCE GmbH. Those who don't know what we can do may not suffer or may not suffer enough to see the value of our services on RATING©REPAIR. Get in touch with us if you are the one who understands what I mean."

 Dr. Oliver Everling, CEO of RATING EVIDENCE GmbH

Why Art Rating Criteria Need To Be Repaired

Agencies, Criteria, Read, Repairs, Reports

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.

Rating Repair of a German Hotel Consulting Company’s Credit Report

Bureaus, Read, Repairs, Reports

How does rating repair work in practice? The following is an example. A full rating repair needs even more than shown here, but this real example of a real company gives a first impression of what it’s all about. Rating repair differs considerably between different size classes of companies, type of organization, legal form, industry, etc. The following is an example of a consulting company that specializes in advising hotels.

The company uses the opportunities to work together in teams of freelancers and employees of the customers. Computers, data and software are the company’s most important assets that can be accounted for. The legal form of a GmbH is used to limit liability from business activities. It is therefore in the case of this consultancy not a function of this legal form to accumulate capital. Despite successful business activity, the balance sheet total is therefore low.

The example looks at the credit report from an international credit reporting agency for a German company. The report cannot be compared to an analysis by a Recognized Credit Rating Agency. However, information like the one shown here helps many suppliers, customers and other business partners as well as authorities before they decide on a business relationship. Wrong information can therefore have fatal consequences.

Every decision maker takes their first look at the summary. The company shown here is doing very well. This is evident from the excellent Credit Index, Risk Score, International Score and Probability of Default. This good assessment does not rule out that the report is incorrect. In particular, minor errors can be found which, although they do not significantly change the overall assessment, nevertheless create a false image of the company. Therefore, all details must also be checked. Examples of this are shown below. The consequence of the analysis can be to contact the credit reporting agency and ask for a correction of the data.

Key Financials and Payment Details Summary

“Days Beyong Terms” (DBT) are the average days beyond terms weighted by the age and amount of invoices. The calculation uses all trade lines received from suppliers of the Trade Payment Programme. The credit reporting agency points at the fact, that this is not a statistic based on representative and complete data. Available trade lines might contain occasional instances which are not representative. It is possible that companies with a high Days Beyond Terms pay within terms on other occasions.In the case of this consulting firm, the sales from suppliers are insignificant. Accordingly, no peculiarities in payment behavior are reported.

Auditor Detials, Business Purpose and Additional Industry Codes

The company shown here has been around for more than a decade. Over the years, the purpose of the company may have changed or the focus of its business activities may have shifted. If so, the consequences for the assessment should be examined. For example, it makes a big difference whether a company offers hotel advice or operates a hotel itself. Hotels have to expect massive losses due to the corona crisis. The industry will have to be assessed accordingly critically.The consultant here in the example is not directly affected by this development, so it remains to be seen whether he might even benefit from the need for restructuring in the hotel industry.

Score Summary

The Score Summary shows the Credit Worthiness “very low risk profile” and an Assessment: “The default risk is reckoned to be very low. The business connection can be approved.” With such a good credit rating, the only question for the assessed company is how the good credit assessment can be secured for the future.

Credit Limit and Contract Limit

The recommended credit limit is calculated using a formula that analyses information from a company’s financial accounts and payment record. The registered company credit limit is the credit reporting agency’s recommendation of the total amount of credit that should be outstanding at any one time. A Contract Limit is the suggested value of a contract that a company can handle. It is an assessment of the subject company and its suitability to carry out a specific contract. It is mainly based on value of the sales that a company can generate. The values shown here are very low, as if the consulting company could only place orders up to € 1k without collateral. Ratingrepair can help to raise the limit here. Various instruments are available for this, which require further advice in order to implement them.

Directors / Shareholders Summary and Current Directors

Credit bureaus get their information from public registers. When the consulting company was founded, three managing directors were appointed. Of these, however, two left the management after just a few years. In the meantime, the management is carried out solely by the majority shareholder. There is a need for correction here. Anyone who continues to research these people would potentially draw misleading conclusions from the information obtained.

Shareholders

As can be seen here, the shareholders were correctly recorded by the credit reporting agency when the company was founded. In the present case, the changes in the shareholder structure were not taken into account.In the meantime, the shareholders had changed. Two shareholders sold their shares. A new partner joined. However, this is not reported here. Since there are no longer any relationships with the old shareholders, this information should be corrected.

Beneficial Ownership

For certain businesses and industries the Anti-Money-Laundering law (Geldwäschegesetz – GwG) requires to check if the trade partner has a beneficial owner. This identification of the beneficial owner shall prevent straw man transactions and identify the natural person in whom the economic interest is being made. At legal persons or companies a beneficial owner is every person who holds more than 25% of the voting rights, more than 25% of the capital share or more than 25% of the assets. Violations against the GwG can be fined up to 100,000 Euro per violation.

There is also a wrong statement here. Incorrect information about a beneficial owner can be severely punished, depending on the circumstances. In our example, the beneficial owner is now the German managing director / majority shareholder and no longer Swiss, as can be seen here.

Assets and Liabilities

The balance sheet shown by the credit bureau shows typical characteristics of a small company: The balance sheet items fluctuate greatly in their amount, since even absolutely small amounts lead to relatively large changes.

Debt Ratio

Find above a comparison of the company based on the industry code (primary) with other companies from the same industry. The analysis of the credit reporting agency has been based on the industry code 70 – Activities of head offices; management consultancy activities. The Debt Ratio measures the ratio between debts and equity of a company. Here, too, the strong fluctuations typical of small companies can be seen, which cannot be compared with those of large companies.

Cash Ratio

The Cash Ratio shows the ratio between liquid assets and short-term debts. The consulting company only delivered the legally required minimum balance sheet to the German Federal Gazette. This does not require a breakdown of the current assets. The liquid assets can therefore not be determined from the publicly available data.These items are accordingly noted in the credit report with dashes. Depending on the situation, it may be advisable to voluntarily break down these items in the annual financial statements submitted to the German Federal Gazette.

Revenue

The revenues indicate the value of goods and services a company sold within it’s ordinary business activity during a trading period. An income statement does not necessarily have to be submitted to the Federal Gazette if certain threshold values for company size are not exceeded. Accordingly, only dashes are used here instead of concrete numbers. Small corporations are those that do not exceed at least two of the three following criteria (1) 6,000,000 € balance sheet total; (2) 12,000,000 € in sales in the twelve months prior to the closing date; (3) an annual average of fifty employees. Micro corporations are small corporations that do not exceed at least two of the three following criteria: (1) 350,000 € balance sheet total; (2) 700,000 € in sales in the twelve months prior to the reporting date; (3) an annual average of ten employees. The disclosure requirements are graded accordingly.

Net Profit Ratio

Net Profit Ratio measures the ratio between operational result and revenue. So it indicates how much the company actually earned with its achieved revenues. For the same reasons of the limited disclosure, the information on the net profit ratio is also not meaningful.In the present example, the credit reporting agency has not made any estimate of these values.

We would be happy to deal with your credit report. After we look into your case, you’ll soon be reading our comment here. Please contact us:

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In summary, there is a need for rating repair here. Errors on the credit report can lower the credit score. Unfortunately, the same is true for correct information. If facts are rather unfavorable that could be published voluntarily in the Federal Gazette or to the credit bureau, this can lead to a worse Credit Index, Risk Score and International Score and an estimate of a higher Probability of Default.

For certain businesses and industries the required check according to the Anti-Money-Laundering law (Geldwäschegesetz – GwG) could not be assisted by the data provided in the credit report. The reported trade partner is not the beneficial owner, since partners had changed.

First Quality Check On A Credit Reporting Agency: Creditsafe

Agencies, Bureaus, Read, Repairs, Uses

This article is about the credit reporting agency Creditsafe, the performance of the company and a concrete example of what a credit report from Creditsafe looks like in practice. Details of the offer are examined and discussed in detail. We carry out a fact check based on the official data from the Federal Gazette of the Federal Republic of Germany.

With more than 1,200 employees, including 120 in Germany, Creditsafe provides business information and financials to over 115,000 customers with over 365 million company data from 160 countries and from more than 8,000 sources. This is roughly an average of more than 300,000 company data per employee, who supports over 500,000 users for 450,000 decisions every day with the data provided by Creditsafe. Company data is updated five million times a day from local sources. This provides insight into the thousands of business events that occur every day. About 60% of reports available online contain payment details from suppliers.

The presentation of Creditsafe is followed by a concrete example. This is a demanding case because it looks so simple and easy to understand at first glance. The example company looks simple, because it is a music house. The business model is very simple. Buying musical instruments from suppliers, selling to customers. But the music house is a wholly owned subsidiary of a parent company. The parent company was founded six years earlier because it focuses on online sales and the entrepreneur previously worked as a sole trader with his family business. The subsidiary does not make use of the permitted exemptions from separate accounting. This raises the question of whether Creditsafe still achieves an appropriate credit rating. In the following, you will first read general information about Creditsafe and the activities of this credit agency.

Creditsafe is fortunate to have an extensive and ever growing database of up-to-date company information. As the database expands and increases the wealth of data Creditsafe holds, they must evaluate whether this data contains information that is indicative of company stability or future insolvency. Creditsafe must also re-validate whether previous indicators of future insolvency or stability remain true. In both cases, it is likely that adjustments to the scorecard will be needed to improve predictability.

creditsafe logo

To differentiate linguistically, Creditsafe calls its customers sometimes “partners” because customers are companies that in turn obtain information about other companies. Creditsafe partners can add companies from Belgium, Germany, Denmark, Finland, France, Great Britain, Ireland, Italy, Japan, Canada, Liechtenstein, Luxembourg, Netherlands, Norway, Austria, Sweden, Switzerland, Spain and USA to a list for which is monitored via email.

Because not all countries use a value from 1 to 100, Creditsafe is using a rating scale from A to E. This rating scale should make it easier to compare the credit risk of companies across national borders. A is the lowest risk, D is the highest, and E means that no assessment has been made.

Creditsafe accesses data on more than 49,000 active listed companies in over 165 countries around the world, as well as hard-to-find historical data on all non-trading companies involved in asset and real estate management:

  • Name, address and contact details of the company (fully verified),
  • Description of the main business activity,
  • Complete data on shareholders and owners,
  • Credit rating and maximum credit limit,
  • Geographical breakdown of sales and turnover,
  • Information about important competitors,
  • Annual and interim reports,
  • Sales, profit and loss accounts,
  • Balance sheets and cash flow,
  • Key balance sheet indicators,
  • Current and former directors,
  • Information about holding companies and subsidiaries,
  • Corporate ties.

The massive use of electronic data processing not only enables this high productivity unimaginable just a few decades ago, but also enables users to check their customers’ credit and financial data in real time. Unlike other credit bureaus, Creditsafe does not save historical reports, but checks all companies about which no information is available immediately. Whenever a report is not immediately available online for review, the company in question is re-examined to collect current, trustworthy information. Creditsafe wants to be able to serve research orders within five and a half days.

Integrating Creditsafe data with a customer relationship management system should be child’s play thanks to preconfigured apps for Salesforce, Sage, SugarCRM, SAP, Microsoft Dynamics, etc. Creditsafe apps should make manual entry and updating of customer data unnecessary and thus save time and resources. An option for the immediate creation and updating of data records is intended to correct and rely on the data.

The application programming interface makes the following systems available for Creditsafe:

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Telephone searches, stock indices, local agents, branches, official gazettes, payment histories, news, banks, directories, courts and registration authorities are among the sources of information (for researching registration addresses, see Civil Address).

Creditsafe also provides mass and individualized data in a file tailored to the ideas of the respective partner. With hundreds of selectable fields that support all aspects of the business, the content is designed to meet the specific requirements. Such files can be securely provided in a format of your choice, daily, weekly, monthly or quarterly.

Via a programming interface, Creditsafe enables integration into customer-specific Customer Relationship Management (CRM) systems and thus the consistent alignment of a company with its customers and the systematic design of customer relationship processes. The programming interface – Application Programming Interface, API for short – is the part of the program that is made available by a software system to other programs for connection to the system.

With Connect API, data should be integrated into the systems mentioned and users should have the opportunity to use Creditsafe business data in any required way. Direct real-time access to company data is intended to enable employees to make quick and informed decisions with data that the company can trust and that allow the development of new functions and automated processes.

If Creditsafe is connected to one of the systems mentioned, the following tasks should be possible:

  • Checking the creditworthiness of suppliers and customers,
  • Representation of corporate ties,
  • Representation of beneficial owners,
  • Credit ratings for companies worldwide,
  • Continuous monitoring,
  • Financial indicators,
  • Current and historical balance sheet numbers,
  • Check for debtor register entries / bankruptcies.

Creditsafe supports customer and credit decisions in companies with creditworthiness information about private individuals, whose data comes from publicly accessible sources. This data is continuously supplemented by data from national and international partners and by manual research. Negative features include recorded in bankruptcy and debtor registers. Overview of all companies in which a natural person is a manager or in which they hold shares (see also Palturai).

The Creditsafe Data Cleaning Tool is a solution to improve data quality and is available in a total of 14 countries to correct duplicates, errors and outdated information, to identify inactive companies and data with a lot of information (such as company master data, balance sheet data, credit ratings, credit limits and contact information) ) enrich.

The Creditsafe Compliance Check supports the identification of potentially high-risk business relationships and their continuous monitoring (monitoring), for example in the case of current and previous sanctions against companies and private individuals, for the identification of Politically Exposed Persons (PEPs) and in the search for court judgments, negative reporting and bankruptcies .

What does a company search on the platform of “creditsafe.com” deliver? In the following you will see what creditsafe has to offer, what information to expect and how key performance indicators are calculated. Screenshots as of August 2020 guide you through the Creditsafe cockpit. Click on the screenshots in the text below to overlay images on the current page and see more details.

As the example of the music store shows, a professional assessment of creditworthiness cannot be replaced by looking at a few key figures. In the presentation of Creditsafe, the credit index and risk score reflect the good creditworthiness of the music store, which is based among other factors on high profitability, but not on a high equity ratio. Equity is created in the parent company, the results of the wholly-owned subsidiary are always transferred to the parent company, and any losses would be offset by the parent company. It is only through an overall view of all the relevant assessment criteria that Creditsafe can come to a plausible credit rating of the company’s creditworthiness.

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Equity Rating Repair

Criteria, Definitions, Methodologies, Models, Performance, Read, Regulations, Repairs, Scales, Symbols, Systems

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 not suitable 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.

Recovery Rating

Criteria, Methodologies, Notching, Processes, Read, Repairs, Systems

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.