Rating Forest Investments

Criteria, Definitions, Investors, Read

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.

spiral stairway of modern hall in contemporary building

When Stocks Are Too Good to Sell – Crossings Can Be Dangerous

Governance

Private investor crossings are independent transactions in which an investor enters a buy and a sell order for one and the same security in a timely manner and thus buys the security himself. Such crossings are bogus and prohibited, warns the Austrian Financial Market Authority (FMA).

Crossings are a form of market manipulation. Many private investors only realize that they have achieved a crossing when they receive mail from the FMA. They usually do not know that crossings are forbidden and see in their actions a negligible administrative offense, since they did not commit them “deliberately” and certainly not with the intention of misleading. Private investors are also mostly unfamiliar with the fact that it is technically possible on the stock exchange, but that the trading rules forbid people to buy a security from themselves.

But crossings are in the eyes of the EU lawmakers bogus deals that can represent a form of market manipulation. According to Art. 15 of the Market Abuse Regulation, they are prohibited throughout the EU and threatened with an administrative penalty of up to € 5 million.

Private investor crossings occur particularly in trading illiquid securities, i.e. those that have a particularly low trading volume. This is because, in the case of illiquid securities, there are no or hardly any other orders with which a matching can take place. The prices at which such transactions are processed therefore do not reflect the conditions that would result from business partners who are unrelated to each other.

One activity that often leads to private investor crossings as “collateral damage” is tax loss compensation towards the end of the year: income from securities is subject to capital gains tax (KESt) of 27.5%. It is possible under tax law to offset losses against profits from securities transactions in a tax-reducing manner, provided that these are realized within the same calendar year. The tax-relevant loss arises when the investor sells a security that he originally bought at a higher price at a currently lower price. However, if the investor wants to keep the security in his portfolio, he will promptly place a buy order in order to buy it back as quickly as possible.

Subscribe to get access

Read more of this content when you subscribe today.

Well on track with around 50% growth

Read

The business development of artec technologies AG (ISIN DE0005209589) in 2020 was positive overall, despite challenges related to the corona pandemic, reports the company from Diepholz / Bremen. After annual sales that increased by around 50% to EUR 3.15 million, the Management Board expects – as forecast, subject to the review – a significantly improved result compared to the same period of the previous year (earnings before taxes 2019: -0.68 million Euro).

In addition to the positive operational development, artec has achieved important strategic milestones, especially in the business with authorities and organizations with security tasks (BOS), from which the company will benefit in the future. In 2020 artec achieved around two thirds of its sales with customers from the BOS area.

In 2020, the company artec agreed new contracts for recurring sales with service, cloud services and software upgrades with a term of up to 4 years in the amount of 750,000 euros. This means that incoming orders in the area of ​​recurring sales were at a record level and well above the planned 500,000 euros. The clients are existing and new customers from both the security and broadcast business areas. They include, for example, three companies – a sports broadcaster, a news agency and a sports academy – from Qatar. Artec was able to benefit from the market exit of a competitor in particular internationally and win new customers in Spain, Turkey, Oman and the United Arab Emirates. Orders from other media companies have been announced. However, due to the corona pandemic, orders are taking longer. In Germany, 8 of the 14 state media authorities are already among the artec customer base. Service and cloud services have been agreed with all of them.

In 2020, artec agreed service contracts with security authorities in German-speaking countries with a volume of 200,000 euros, according to the report from artec. Artec sees considerable growth potential in this area in particular. Together with specialists from German security authorities, the MULTIEYE BOS Manager was developed as a cloud-based platform for situation centers and control centers, e.g. for crime prevention. The BOS Manager has proven itself in practice with customers in 2020 and has met with great interest from security authorities in the DACH region – an excellent starting point for the future growth of artec technologies AG.

Rock Tech Rocking The Market

Investors, Read

What made the stock price of Rock Tech Lithium Inc. (Rock Tech) double within just two months? The answer might be here: Apeiron Investment Group, the family office of serial entrepreneur and investor Christian Angermayer is committed to the success of Rock Tech.

Christian Angermayer sees a huge opportunity and the perfect timing for his continued investment into Rock Tech Lithium: “The world is focused on the rise of electric cars – driven by innovators such as Tesla and now also Apple. And rightly so. The era of fossil vehicles is over. Many still underestimate the massive change we are seeing, which will sweep away many traditional car makers. But all the new EV players need Lithium batteries. It fascinates me how much many stakeholders still underestimate the lithium shortage we will in my view soon encounter. Rock Tech Lithium has a bold vision not just to become one of the premier producers of the raw material, but also an innovative Chemtech company”.

Rock Tech just announced the successful closing of its non-brokered private placement of 9,994,447 units of the Company at a price of $0.85 per Unit for gross proceeds of $8,495,279.95. “We have received very positive feedback and high demand for our private placement from renowned institutional investors, confirming that we are very much on the right track,” said Dirk Harbecke, Chairman of Rock Tech, who invested significantly himself. “The collected funds will help us to further accelerate our project development – a huge opportunity in an environment where other projects, also of the global players, still remain on hold due to the corona crisis uncertainties.”

The Offering round was led by Apeiron Investment Group, the family office of Christian Angermayer, who subscribed for over 30% of the Offering and will, after closing, own 19.6% of the Company on a partially-diluted basis. Dirk Harbecke subscribed for over 11% of the Offering, bringing his partially-diluted ownership position, after closing, to 17.7%.

Proceeds from the private placement will be used, says Dirk Harbecke, to fund a Pre-Feasibility Study (“PFS”) on a lithium hydroxide converter, continuing investigations of the Company’s innovative lithium hydroxide processing circuit, further development and permitting work at the Company’s Georgia Lake lithium project and general working capital.

DEFAMA’s Gemstones Among German Commercial Real Estate

Criteria, Read

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.

CoStar: A Star Rising Higher

Agencies, Data

The Washington based CoStar Group (WKN: 922134 / ISIN: US22160N1090, Symbol: CSGP), with a staff of over 4,300 worldwide, is a company to watch in the rating industry, since CoStar is a leading provider of commercial real estate information, analytics and online marketplaces. In addition to its importance to the rating industry, it is also rated “investment grade” by leading credit rating agencies (Moody’s, Fitch Ratings).

Founded in 1987, CoStar conducts expansive, ongoing research. The claim of the company is to produce and maintain the largest and most comprehensive database of commercial real estate information. CoStar bought Thomas Daily in Germany, which was already well known among rating analysts not only in Germany. Thomas Daily became a subsidiary in 2016.

CoStar offers a significant suite of online services enabling clients to analyze, interpret and gain unmatched insight on commercial property values, market conditions and current availabilities.

  • Along with Thomas Daily, CoStar comprises a number of strong brands, such as
  • STR, which provides premium data benchmarking, analytics and marketplace insights for the global hospitality sector.
  • Ten-X provides a leading platform for conducting commercial real estate online auctions and negotiated bids.
  • LoopNet is the most heavily trafficked commercial real estate marketplace online with over 7 million monthly unique visitors.
  • Realla is the UK’s most comprehensive commercial property digital marketplace.
  • Apartments.com,
  • ApartmentFinder.com,
  • ForRent.com,
  • ApartmentHomeLiving.com,
  • Westside Rentals,
  • AFTER55.com,
  • CorporateHousing.com,
  • ForRentUniversity.com and
  • Apartamentos.com form the premier online apartment resource for renters seeking great apartment homes and provide property managers and owners a proven platform for marketing their properties.
  • By December 17, 2020, the US Federal Trade Commission (FTC) has cleared CoStar Group’s acquisition of Homesnap, Inc., an industry-leading provider of technology solutions to the real estate industry. CoStar and Homesnap submitted the proposed merger for FTC review in late November 2020.
  • CoStar announced its acquisition of Houses.com, setting the stage for its entry into residential real estate marketplaces.

Homesnap powers the nation’s most productive agents who regularly rely on having its accurate, real-time MLS information and enhanced productivity features at their fingertips. Supported by a consortium of hundreds of the country’s largest multiple listing services (MLSs), more than 1.1 million real estate agents have access to Homesnap’s free professional product, Homesnap Pro, representing over 90% of the residential real estate agents and listings in the United States. Homesnap’s public residential real estate portal showcases 1.3 million active property listings and tens of millions of home shoppers use the Homesnap website and app to look for a home.

“Adding Homesnap to CoStar Group’s network provides significant complementary value to our existing arsenal of broker and agent-centric tools, directly benefiting the entire industry,” said CoStar Group founder and CEO Andy Florance. “We are proud to join CoStar Group and leverage their more than 30 years of knowledge and experience in property data, software and marketing to take advantage of this significant growth opportunity,” said John Mazur, CEO of Homesnap.

CoStar Group’s websites attracted an average of approximately 69 million unique monthly visitors in aggregate in the third quarter of 2020.

black camera

A Case of Rating Repair for a Small Publicly Traded Company

Agencies, Analysts, Bureaus, Raters, Read

A small publicly listed company is a company whose shares are bought and sold on a particular stock market even though turnover or total assets are small in comparison to other listed companies. Every big story starts small. Therefore, among small companies there are often also stock corporations with exceptionally high potential for a good share price development. Small businesses can also be great debtors. Well-managed companies can have excellent credit ratings over long periods. Therefore, such companies are attractive to bond investments, provided they have issued bonds.

The internet is full of investment offers. The disadvantage of this information, however, is that it is often written with the interest of selling securities. Many stock market letters testify to how spectacular sounding promise of returns can be advertised to investors. Alternative ways of obtaining reputable information about good companies are therefore of interest.

The following is an example of how an interesting company can be found and analyzed using the database of a credit reporting agency. Thousands of companies worldwide use Creditsafe to grow their business and reduce exposure to customer credit risk. With Creditsafe it is easy to determine the maximum amount of credit to extend to a company based on company information including, payment history, County Court judgments (CCJs), financial stability, credit scores and limits. Credit managers enjoy to be able to access credit reports for companies anywhere in the world.

A database like that of Creditsafe can be used not only in customer and delivery relationships, but also in all other relationships with company stakeholders. The following example shows, on the one hand, which information can give reason to deal with a company in more detail. On the other hand, the example also shows what can be misunderstood and therefore give rise to a rating repair.

Creditsafe allows to search a database of more than 240 million company credit risk profiles to determine the risk when trading with overseas companies. This information is valuable in identifying good quality companies. In particular, companies can also be found that are particularly attractive for their business partners because they have a good credit rating.

For companies in certain industries, a good credit rating is of crucial importance for business success. For example, in most countries around the world, governments apply very strict standards to the companies with which they work. The creditworthiness is checked for each invitation for tenders. The seriousness and creditworthiness of a company that supports governments in the area of security is particularly important.

The following company is a typical example. The listed company (A6T) artec technologies AG from Diepholz / Germany was founded in 2000 by Thomas Hoffmann and Ingo Hoffmann and develops and produces innovative software and system solutions for the transmission, recording and analysis of video, audio and metadata in networks and the Internet. Since 2000, customers have been using the product platforms MULTIEYE® for video surveillance and security, especially in industrial and governmental environments, and XENTAURIX® for media & broadcast applications for monitoring, streaming, recording and analysis of TV, radio and web livestream content. artec offers its customers a complete service (project planning, commissioning, service & support) both for the standard products and the special developments.

The Creditsafe Rating Model is a predictive analysis tool that uses the latest advanced statistical techniques. It combines commercial and other key information, including trade payment information, public information, key financial ratios, industry sector analysis and other performance indicators which provides you with view of a company.

The business credit score measures the likelihood that a business will remain solvent for the next 12 months. But as the executives behind millions of transactions each year are relying on business credit scores to help them answer questions like: Which vendor should we work with? Can we continue to work with this supplier? What kind of terms can we offer them? and How much funding should can we offer them? Business credits scores are much more than that simple definition.

The Creditsafe Rating Model was created by an analytics team who looked at companies that failed over the last 12 months and assessed the commonalities within these failures. They compiled hundreds of variables and looked at the weighting each variable carried along with the impact each variable had on the failed businesses. They then selected a number of variables which were compiled together to create the modules.

The company stands out at Creditsafe with an excellent credit rating. artec technologies AG (DE01958811) is reported with a very good Credit Index of 1.1, a Risk Score of 97 (on a scale from 0 to 100), the best International Score A and an extremely low Probability of Default of 0.06%.

Initially, the good credit rating seems to be confirmed in the balance sheet data. Compared to most other stock corporations in Germany, the company has a high level of equity both in absolute and relative terms. The solid lines in the graph show the comparative values for the 25% and 75% quartiles as well as the medians. Equity is the capital that remains at a company’s disposal after debts are deducted from the total assets.

It is a comparison of the company based on the industry code (primary) with other companies from the same industry. The analysis has been based on the industry code 82 – Office administrative, office support and other business support activities. The Equity Ratio measures the ratio between equity and the total assets of a company.

The Total Borrowing Ratio measures the ratio between debts and total assets of a company. The Debt Ratio measures the ratio between debts and equity of a company. Other key performance indicators measure liquidity, e.g. the Cash Ratio shows the ratio between liquid assets and short-term debts.

The performance indicators determined by Creditsafe include “Capital Structure” and “Liquidity” as well as “Results & Profitability”.

At this point the information must be confusing. No results are reported. This affects the following key figures in the Creditsafe model:

  • Revenue indicates the value of goods and services a company sold within it’s ordinary business activity during a trading period.
  • Pre Tax Profit Is calculated from the operational result plus financial result plus extraordinary result or from the net income plus the net tax expenditure.
  • Net Profit Ratio measures the ratio between operational result and revenue. So it indicates how much the company actually earned with its achieved revenues.
  • Return on Assets indicates the rate of return for a company’s total assets.
  • Return On Capital Employed shows the rate of return for a company’s capital. In distinction from the Return On Assets Ratio , this indicator considers just the long-term capital.

No values are shown for any of these key figures for the company under consideration here, artec technologies AG. Therefore one has to ask about the reasons why there are no values here.

The report of the Deutsche Bundesbank, the central bank in Germany, is also linked on the homepage of artec technologies. Like Creditsafe, this report confirms that the company has a good credit rating.

As part of Eurosystem monetary policy operations, commercial banks can submit credit claims as collateral for refinancing at the Deutsche Bundesbank. For this, the borrowing enterprises must be considered “eligible”. This is checked in a credit assessment conducted by the Bundesbank. Enterprises may also request a credit assessment. In either case, the Bundesbank provides the enterprise with the results of the credit assessment in their entirety. The aim of Bundesbank’s credit assessment system is to estimate an enterprise’s one-year probability of default (PD) on the basis of financial statements as precisely and reliably as possible. For that purpose, Bundesbank uses a statistical methods to select the ratios which, when combined, are best able to predict an enterprise’s PD.

Credit rating grades of the Deutsche Bundesbank and external credit rating agencies authorised in the Eurosystem are related. This is the example of S&P’s credit ratings:

The data input to Creditsafe can easily be checked under the “Documents” tab. This shows that, as expected, Creditsafe used data from the Federal Gazette. German companies are obliged to publish their financial statements in the Federal Gazette. In the case of the artec technologies AG considered here, however, no data on the income statement was published in the Federal Gazette.

The website of artec technologies also offers the reports of three research companies, which offer in-depth analyzes with all other aspects of stock valuation.

The missing income statement in the credit bureau’s report is due to the legal situation for small, medium and large companies. The size classes (Größenklassen) defined in the HGB serve to regulate accounting and publication for incorporated companies (Kapitalgesellschaft). The larger a capital company is, the stricter the requirements for auditing and the more detail required when disclosing the business data. The four size classes are defined in the HGB for accounting law. They are used for corporations, including the GmbH, the UG and the AG. The size classes are also applied to partnerships without a natural person as a personally liable shareholder (GmbH & Co. KG, UG & Co. KG).

In § 267 HGB, four size classes are defined: micro-company, small company, medium-sized company and large company. For each size class, at least two of the three thresholds listed for each class should not be exceeded. The thresholds are as follows:

  • Balance sheet total (Bilanzsumme),
  • Average number of employees,
  • Revenues (twelve months before the balance sheet date).

The thresholds were changed in 2016 with the German Accounting Directive Implementation Act (Bilanzrichtlinie-Umsetzungsgesetz – BilRUG). The size classes are structured as follows:

Determining FactorMicroSmallMediumLarge
Balance sheet total (Bilanzsumme)350,000 EUR6,000,000 EUR20,000,000 EUR> 20,000,000 EUR
Revenues (12 months before the balance sheet date)700,000 EUR12,000,000 EUR40,000,000 EUR> 40,000,000 EUR
Number of employees on an annual average1050250> 250
artec technologies

Small companies must disclose their balance sheet and their notes. The profit and loss account is not mandatory. In addition, the audition requirement is dropped. In the case of artec technologies AG, the information published is part of the company’s follow-up obligations due to its membership of a transparency standard at the Frankfurt Stock Exchange. The obligations result from these obligations, but not from Section 267 of the German Commercial Code.

The shares of artec technologies AG are traded on the Open Market. The Open Market (Freiverkehr) is a regulated exchange market and not an organised market in the meaning of the German Securities Trading Act (section 2 para. 5 WpHG). Unlike the Regulated Market, which is subject to public law, the Open Market is subject to private law. The General Terms and Conditions of Deutsche Börse AG for the Regulated Open Market (Freiverkehr) on Frankfurter Wertpapierbörse (FWB®) regulate the conditions for admission to and the follow-up duties for securities in the Open Market segment. Admission to the Open Market is possible for securities that are neither admitted to trading on the Regulated Market nor included in trading on the Regulated Market.

Issuers and participants in the Open Market are subject to lower transparency requirements than in the Regulated Market. The Open Market segment is therefore an attractive alternative for both young, growth-oriented small and medium-sized companies such as artec technologies AG.

Since all of this information is public, it is advisable to update the information with the credit reporting agencies. Since these credit bureaus have to enter and update very large amounts of data from many companies in their databases, they rely on the official publications of the companies in the Federal Gazette. If the annual financial statements are reported to the Federal Gazette without a profit and loss account, then by default the data from the income statement are not transferred to the credit reporting agency’s database.

Important key figures about the stock corporation can be viewed free of charge on the website of the Frankfurt Stock Exchange. There are also research reports from SMC, EDISON and GBC. Not to be forgotten are the numerous other information tools, such as price information for technical chart analysis and risk indicators such as those from Moody’s, all of which provide information about artec technologies AG and offer investors certainty in their decisions.

Generally accepted, Bayesian statistics is a theory in the field of statistics based on the Bayesian interpretation of probability where probability expresses a degree of belief in an event. For rating systems, this theory says that if information is missing, a judgment should be made more cautiously than if the required information is available. If only the balance sheet and not the profit and loss account are taken into account in a rating, the result may be a poorer assessment. It is therefore advisable to add missing information.

Statistical credit rating models specify a set of statistical assumptions and processes that represent how the sample data is generated. Statistical credit rating models have a number of parameters that can be modified. For example, the event of a default can be represented as samples from a Bernoulli distribution, which models two possible outcomes. The Bernoulli distribution has a single parameter equal to the probability of one outcome, which in most cases is the probability of filing for insolvency. Devising a good model for the data is central in Bayesian inference. In Bayesian inference, probabilities can be assigned to model parameters. Parameters can be represented as random variables. Bayesian inference uses Bayes’ theorem to update probabilities after more evidence is obtained or known.

In our practical case, these theoretical considerations mean that the lack of information can lead to disadvantages in the evaluation. It is more likely that the missing information will result in a worse rating than with full disclosure. In most cases, a better rating is achieved when more information is disclosed.

In the case of a rating agency recognized under the EU regulation on credit rating agencies that carries out a committee-based rating process, however, the lack of information in the case of unsolicited ratings must not be used as a means of pressure on issuers to urge them to commission a rating process. With a credit reporting agency like Creditsafe, however, this case does not matter. The rating is determined purely mathematically-statistically and based on models without involving a rating committee made up of analysts who could make arbitrary decisions. In addition, there is no fee for the rating that could create a conflict of interest. It therefore remains a sensible way to enable a better evaluation by providing more up-to-date information.

In most cases the credit reporting agency provides the assessed company with its own company report free of charge. An application to receive your own report is sufficient with Creditsafe.. The authorization to receive information must be proven by the company’s employee. However, the company is free to refer business partners and investors to the report of the credit reporting agency and the credit rating contained therein. Similar to the reference to the central bank eligibility certified by the Deutsche Bundesbank, such a reference can strengthen confidence in the company being assessed.

The irritation about missing P&L data in the reports of the credit reporting agency about artec technologies can be easily resolved. For this it is not necessary to expand the disclosure to the Federal Gazette. It is sufficient to provide the credit reporting agency with the certified accounts. A form is available for this that simplifies and standardizes the transfer of data. All financial reports can be found on the company’s German website:

However, it can also be advisable to expand the disclosure to the Federal Gazette. Not only Creditsafe, as in the example, but also many other credit reporting agencies, research houses and, last but not least, financial service providers such as banks and insurance companies access the Federal Gazette. In order to fulfill their various obligations, to check the identity of their business partners and to determine the beneficial owner, they need official data.

PALTURAI is the example of a service that is also used by investors and creditors such as banks and insurance companies to examine the situation at a company. For this purpose, PALTURAI analyzes all reports to registration courts as well as to the Federal Gazette. In order to avoid contradicting information and irritations to the detriment of the rated companies, a consistent approach is recommended. The international data flows and interdependencies in the transfer of information worldwide are more complex today than ever before. The task in the context of a rating repair is to bring about the correction in the most efficient way possible.

With a very good rating like the one for artec technologies, the question arises whether the already very good rating could possibly even be called into question through more transparency. The income statement contains additional information that is taken into account when assessing creditworthiness. For artec technologies, the data that cannot be found in the Federal Gazette has now been added. It shows that the creditworthiness is still rated as very good. The company retains its very good ratings.

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.