The German government has taken a number of steps to prevent business failures during the pandemic. The support schemes have helped many companies avoid insolvency. However, as these schemes are being phased out, the business community is bracing itself for a wave of insolvencies. Many clients are currently grappling with this scenario. That is why it is so important to discuss countermeasures now. In this episode of „hsp live at 11“, hsp Managing Director Paul Liese welcomes Senior Analyst Holger Becker from Creditreform Rating AG. The two discuss, how a balance sheet rating can help a tax adviser and their clients secure a loan for the business.
Holger Becker from Düsseldorf used to be a banker and has 20 years’ experience in the banking sector. Early on in his career, he began working on ratings and analyses. Ten years ago, he finally set up his own business and has been increasingly active in the field of training and professional development – naturally, mainly in his specialism of ratings and rating analysis.
How do the pandemic, credit ratings and companies all fit together? Holger has found that banks are currently dealing with the pandemic and its effects in very different ways. The reason for this is that various factors, such as the Covid-19 support schemes, mean that balance sheets and figures need to be interpreted in very different ways. Banks are currently in a phase of assessment: which borrowers will manage to get back on track without assistance, and which borrowers would be at risk without it?
A change in the banking sector’s outlook
To some extent, the pandemic has changed the way banks view things. Banks essentially look to identify where the risks lie. As they cannot get to know companies from the inside, they have only the figures to go by. Now, however, they are examining what the companies’ figures looked like before the pandemic and during it. Banks are now scrutinising these figures more closely than they did before.
Tax advisers should sit down with their clients today and try to see things from a bank’s perspective. After all, business owners do not necessarily know how to assess their own figures. This is where tax advisers can help by interpreting the figures and preparing businesses for discussions with banks. But is it realistic for tax advisers to adopt the perspective of banks? Holger believes it would be helpful if someone were familiar with the banking world.
Communication is everything
It is often a one-way street: banks rarely approach businesses if the figures do not add up. In such cases, it is always helpful if a tax adviser can act as a mediator, drawing on their specialist knowledge. After all, both sides have legitimate interests. Furthermore, banks are bound by regulations. They cannot always decide freely, even if they wanted to. Anyone who is unaware of this cannot prepare properly for discussions and loan negotiations. However, if a tax adviser is aware of this, they can pull the right strings when problems arise to overcome the regulatory hurdles.
An additional problem is that one only speaks to the bank adviser and not directly to the key decision-makers. Therefore, as an external party, I must provide the bank adviser with the correct documents and information, which he can then pass on accurately. He simply must be in a position to convey the information. Conveying all information verbally therefore carries a significant and, above all, unnecessary risk. Consequently, not only should documents such as reports and ratings be made available in writing, but the supporting arguments should be too. Paul spontaneously suggests providing the information via video – though Holger has no experience with this, so they’d simply have to give it a go.
Ratings are helpful in negotiations
But how exactly does a balance sheet rating help during loan negotiations? Holger points out that, in this context, ‘balance sheet’ actually refers to the entire annual report. When rating an annual financial statement, one adopts the bank’s perspective. This is because when drawing up the balance sheet, the focus is not on an analytical perspective, but on that required by the legislator. Banks, however, look at entirely different factors, such as risks to equity capital or similar issues. The rating process – for example, that carried out by Creditreform Rating AG – simulates the bank’s perspective. Consequently, a rating can be used in advance to determine which aspects the bank will focus on and how a company’s own key figures will be viewed by a bank.
And when should the rating be requested or carried out? It is certainly advantageous to obtain the rating before the annual accounts are finalised, so as to be able to adjust the figures or disclosures, at least within the legal framework. Holger notes here that with every rating, there is always a possibility that the bank will take a slightly different view and deviate from the rating. It is therefore always important to communicate in good time what work has been carried out in advance on the rating or annual report, and what the reasons were for seeking to optimise the rating. Only in this way can the bank properly assess the company and the rating.
As a general rule, it is always better to go into a loan meeting with a financial assessment. The assessment demonstrates that the company has already analysed its balance sheet and its own key figures in advance. Particularly when the assessment is requested by the tax adviser, the adviser is in a much better position to engage with the company at an earlier stage. Many people also forget that, in addition to the facts and figures, a balance sheet rating includes an assessment of the company’s future development. This information is particularly important and helpful when it comes to granting a loan.
A counterbalance to the bank
Does the credit rating report actually serve as a counterbalance to the bank’s opinion? Holger certainly sees it that way. After all, the rating was compiled by an independent body and provides a strong basis for argument. This is also permitted: the rating may be used as a basis for argument during loan negotiations.
Over the coming months, a new e-learning course will be launched for the hsp Academy, featuring Holger Becker discussing his specialities: balance sheet ratings and analyses. Next week on „hsp live at 11“, Samuel Königshoven will be talking to Viktor Rebant about tools for digitalisation and the resulting database.
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