The different 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+
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

Information

Last modification 30.07.2018

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