Solvency ratings

Banks have developed a complex system of ratings to determine the solvency of a company. An overview of these classifications is given below.

For a long time, banks simply divided risk into good and bad risks. After the painful wake-up call of stock-market and real-estate speculation phases, financial institutions have now developed detailed lists of evaluation criteria—lists they continue to fine-tune.

UBS rating system compared with that of Standard & Poor’s and Moody’s:

UBS rating	Comparison with Standard & Poor’s rating	Comparison with Moody’s rating
0 1	AAA	Aaa
2	AA+ AA AA-	Aa1 Aa2 Aa3
3	A+ A A-	A1 A2 A3
4	BBB+ BBB	Baa1 Baa2
5	BBB-	Baa3
6	BB+	Ba1
7	BB	Ba2
8	BB-	Ba3
9	B+	B1
10	B	B2
11	B-	B3
12	CCC	Caa
13	CC C	Ca C
Default	D

Source: UBS, Annual Report 2016

Credit Suisse uses a customer rating for Switzerland divided into 19 categories. It can be compared to the categories used by the Standard & Poor's and Moody's rating agencies:

Rating class	Description	Comparison with Standard & Poor’s rating	Comparison with Moody’s rating
CR01 CR02	Minimum risk The borrower has excellent solvency and can absorb extreme upheavals.	AAA AA+	Aaa Aa1
CR03 CR04 CR05	Extremely limited risk The borrower has extremely good solvency and can absorb very severe upheavals.	AA AA- A+ A	Aa2 Aa3 A1 A2
CR06 CR07	Very limited risk The solvency of the borrower is very good, and it can absorb severe upheavals.	A- BBB+	A3 Baa1
CR08 CR09	Limited risk The solvency of the borrower is good, and it can absorb adverse developments.	BBB BBB-	Baa2 Baa3
CR10 CR11 CR12	Medium risk The solvency of the borrower is adequate for absorbing unexpected adverse developments; no changes that could potentially threaten credit are expected.	BB+ BB	Ba1 / Ba2
CR13 CR14 CR15	Increased risk The borrower has limited solvency in terms of absorbing unexpected adverse developments; changes that could potentially threaten the credit are to be expected.	BB- B+	Ba3 B1
CR16 CR17	High risk The borrower has very limited solvency in terms of absorbing unexpected adverse developments; risk of late payment.	B B-	B2 B3
CR18	Very high risk The borrower has extremely limited solvency in terms of absorbing unexpected adverse developments; a very high risk of late payment, breach of the contract, termination of the credit contract, capital loss, over-indebtedness, prosecution requests and a debtor's insolvency declaration can be anticipated.	CCC+ CCC CC	Caa1 and higher
DCR	Standard/obvious risk rating Value adjustments relating to the position (cash loans) or provisions (contingent liabilities) are sufficient; any adverse developments lead directly to credit losses.	D	D

Source: Credit Suisse

It is important to stress that this is the best approximation possible, as the categories overlap.

The decision criteria are similar across all the banks. The following factors influence the rating:

Financial factors

Financing potential
What is the ratio between debt and cash flow? In what timeframe will the company be able to repay the loan? What amount can be allocated to the payment of interest and the repayment of the borrowed capital?
Productivity and profitability
What is the ratio between turnover and financial commitments? How much is the return on investment?
Liquidity
What is the amount of readily realizable assets compared to the short-term bank debt?
Financing ratio
What is the ratio between equity and liabilities?

Non-financial factors

Corporate management
How is the managerial structure organized? How are tasks allocated within the management structure?
Investments
What is the proportion of non-operating investments (e.g. luxury cars, design furniture) compared to operating investments (e.g. computers, machines)?
Budget planning
How is the budget drawn up and to what extent do the actual figures correspond to the forecast figures?
External factors
How does the company manage external parameters such as the environment, market liberalization and the EU?

Individual factors

Temporary
Is the company temporarily subject to the influence of unusual factors?
Permanent
Does the company have atypical structures?

Factors linked to the business sector

Economic context
What are the economic trends affecting the branch?

However, a rating so determined is not engraved in stone. Banks generally carry out a solvency analysis each year. With detailed and transparent information, it is possible to positively influence a rating with:

specific business plans containing detailed and comprehensible results
presentation of pending projects
outline of current and future trends of the company
strategic outline indicating plans to succeed on the market in the medium and long term

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