Rating forecast

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The rating forecast is a prediction of the effects of corporate planning on the future rating . A distinction must be made between the two forms

  • deterministic rating forecast, in which, based on the corporate planning, the expected future rating is deduced, in which financial indicators are derived from the corporate planning that determine the rating and
  • stochastic rating prognosis, which also take into account risks (possible deviations from the plan) and thus also forecast ranges for the development of the future rating.

Use of the rating forecast

In order to reduce the potential risk of a bad rating, it is advisable for every company to develop preventive rating strategies that ultimately aim to increase competitiveness on the capital market . The (extensive) foundation of the ratings on financial indicators , as used in the deterministic rating forecast, inevitably means that the overall rating can only be influenced to a limited extent , at least in the short to medium term. An improvement in the potential for success and thus the future prospects of a company essentially only affects the rating when this improvement has already been reflected in the key financial figures. The financial rating of the last annual financial statements also shows a picture that has arisen through the "accidental" realization of certain risks ( interest rate , economic situation, etc.) and cannot necessarily be carried over to the future - especially not if the company itself has made major changes (e B. Investments ) plans. By creating a rating forecast on the basis of corporate planning, it can be seen whether a serious deterioration in the rating is to be expected in the future (for example due to planned major investments) and immediate countermeasures must be initiated. The company management is given the chance to act proactively long before a rating deterioration for a credit institution becomes recognizable in the financial figures. The ( aggregated ) overall risk of a company can be explicitly compared with its risk-bearing capacity ( equity and liquidity reserves ). The consequences of possible future risks (e.g. economic downturn, damage to property, plant and equipment) on the rating can be assessed in a well-founded manner, which enables targeted risk management measures in good time (in the sense of a "balance sheet protection concept"). With traditional financial ratings, the consequences of risks for the rating are only recognized when the risks have already occurred and have negatively impacted the company's profitability.

Deterministic rating forecast

All rating forecasts are based on corporate planning, i.e. planning the future profit and loss account and the future balance sheet.

In the case of a deterministic rating forecast, these plan values ​​are used to derive which key figures for a financial rating (e.g. return on total capital , equity ratio ) would result if this plan were realized. The corresponding financial key figures (and possibly other rating determinants ) are then condensed into a forecast with regard to the future development of the rating.

The key figures used for a rating forecast are usually derived from discriminant analyzes , logistic regressions or neural networks . The following key figures, which are extracted from the plan P&L and balance sheet (see Meyer 2000), form the basis for the forecast:

The result of the deterministic rating prognoses shows the current rating of a company and forecasts the future development depending on the forecast financial figures. No statements are made about the ranges within which future development will move. These statements are provided by the stochastic rating forecast.

Stochastic rating forecast

The stochastic rating forecast shows the current rating of a company as well as the future development of the rating and evaluates the realistic extent of deviations from this rating forecast (i.e. a range with realistic upper and lower limits of the future rating).

Rating forecast with risk-related bandwidths (stochastic rating forecast)

The technology for rating forecasts requires a systematic, quantitative evaluation of corporate planning (possibly adjusted with benchmark values). Due to the risks associated with every forecast (i.e. possible deviations from the plan), a simple implementation of corporate planning in key financial figures and the assignment of corresponding rating classifications is only a first step. In order to obtain a realistic assessment of the possible bandwidth of the future rating, it is necessary to assess the planning security, which is done by the simulation-based aggregation (risk aggregation) of all significant company risks in the planning.

The method of risk simulation ( Monte Carlo simulation ) used for this is based on the calculation and evaluation of a large representative number of risk-related future scenarios of the company. This gives a realistic assessment of possible development corridors of the company, which in turn enables information such as the equity requirement, the risk-adjusted cost of capital, and also the rating and the probability of insolvency .

In the case of stochastic rating forecasts, two variants can be distinguished. As a direct further development of the deterministic rating forecasts, stochastic rating forecasts can be used to estimate not only the expected value of financial rating indicators based on the planning, but also their complete probability distribution (and thus their bandwidths). The probability distribution of the individual rating criteria is then condensed into a probability distribution of the overall rating (and the probability of default) (“indirect rating”). In addition or as an alternative, a so-called “direct rating” can be carried out with a stochastic rating forecast. It is directly from the probability distribution of the profit and the free cash flow on the probability for

  1. Over-indebtedness and
  2. Illiquidity

closed, which enables an immediate calculation of the insolvency probability (as an estimate for the default probability). The calculation of key financial figures is not necessary with this variant.

Summary and Outlook

It has been shown that by including corporate planning when deriving rating forecasts, a significantly higher level of transparency and a better foundation can be achieved. In corporate planning, the expected development of equity and liquidity is expressed as well as the risks relevant to the rating assessment with regard to these two parameters. In principle, corporate planning is suitable for drawing direct conclusions about the likelihood of insolvency and is therefore of particular importance for the rating forecast from a theoretical point of view. In order to use the proven year-end analyzes with their strengths in short-term insolvency prognoses and the assessment of the success potential of companies for long-term future prospects, it is advisable to network the various methods in an integrated overall model, which leads to meaningful results in both short and short term also leads in the medium and long term and at the same time enables a plausibility check of the different data .

literature

  • K. Füser, W. Gleißner: Rating Lexicon . Beck Juristischer Verlag, Munich 2005, ISBN 3-423-50882-5 .
  • W. Gleißner: Value-oriented analysis of corporate planning based on risk management. In: Financial Operations. Issue 7-8, 2002, pp. 417-427.
  • W. Gleißner: Rating forecast, solvency test and rating impact analysis - new instruments for crisis prevention and rating strategy. In: Credit & Rating Practice. Issue 03, 2009, pp. 38–40.
  • W. Gleißner, F. Leibbrand: Indicative rating and corporate planning as the basis for a rating strategy. In: A.-K. Achleitner, O. Everling (Ed.): Handbuch Ratingpraxis. Gabler, Wiesbaden 2004, ISBN 3-409-12523-X , pp. 369-411.
  • C. Meyer: Customer balance sheet analysis of credit institutions. 2000.
  • M. Weber, JP Krahnen, F. Vossmann: Risk measurement in the lending business: An empirical analysis of bank-internal rating procedures. In: ZFBF. Special issue 41, pp. 117–142.