modeFinance 2007-2009 Overview

Triennial Overview: 2007-2009

modeFinance Triennial Overview 2007-2009

In order to give a financial and economic overview of miscellaneous companies from different countries, modeFinance analysts executed a deep analysis on the corporate credit rating behaviors for the years 2007, 2008 and 2009 all around the world.

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Triennial Overview: 2007-2009 How many companies?

In order to give the most clear overview of the evolution of the companies’ ratings all around the world, modeFinance has selected around 3'000'000 companies using the following parameters:  companies with available data for each year: 2007, 2008, 2009;  companies with Confidence Level (please see Appendix for the definition of Confidence Level) greater than 80% for each year: 2007, 2008, 2009.

Geographical Macro Region Western Europe Eastern Europe Far East and Central Asia North America Middle East South and Central America Oceania Africa

Number of evaluated ratings 2'186'282 584'663 178'782 4'972 3'089 2'278 1'362 579

TOTAL

2'962'007

modeFinance AREA Science Park Padriciano 99 34012 Trieste ITALY

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Triennial Overview: 2007-2009 How much Total Turnover?

The sum of the Total Turnover of the rated companies is 40 trillion Euros. The distribution of the Total Turnover for the rated companies is shown in the following graph:

The evolution of ROI and ROE?

On the evaluated companies, a statistical study of the distribution of ROI and ROE during the observed years (2007-2008-2009) was done. With this observation an important degrading of the companies’ performances in both two profitability ratios were clearly seen. The ROI has fallen from 5.09% to 3.13%; the ROE has fallen from 7.35% to 2.33%.

modeFinance AREA Science Park Padriciano 99 34012 Trieste ITALY

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Triennial Overview: 2007-2009

modeFinance AREA Science Park Padriciano 99 34012 Trieste ITALY

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Triennial Overview: 2007-2009 The evolution of the debts?

Using the Leverage Ratio it is possible to understand the evolution of total debts during the years in the study.

The Leverage ratio shows a more stable evolution in comparison to the profitability ratios.

How many companies with profits or losses?

On the same companies, modeFinance evaluated the distribution of companies with profits or losses during the three year period: an important degrading in the performance is clear.

modeFinance AREA Science Park Padriciano 99 34012 Trieste ITALY

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Triennial Overview: 2007-2009 And what about the corporate credit rating?

To understand the trends in ratings over the years, the comparison among 2007, 2008 and 2009 performances are exhibited in the following graph. Thanks to the comparison among years, it is possible to observe the trends in the ratings within the years. The first figure shows the distribution of the three years’ rating results; in addition to this the aggregated classes of ratings can be observed in the second figure. (The aggregated classes are Healthy, Equilibrated, Vulnerable and Riskyplease see the Appendix). How the corporate rating degraded during the years is clear.

modeFinance AREA Science Park Padriciano 99 34012 Trieste ITALY

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Triennial Overview: 2007-2009

Does the size of the company have modeFinance split the evaluated companies in three influence on the performances? different turnover classes in order to understand the evolution during the year in comparison with the size of the companies. It is possible to observe a more stable behavior for the small companies, even starting from a more risky position.

modeFinance AREA Science Park Padriciano 99 34012 Trieste ITALY

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Triennial Overview: 2007-2009

BBB BB

B CCC

Does the geographic location of the modeFinance split the evaluated companies in the company influence the macro geographical regions and studied the rating performances? evolution during the year. It is possible to observe that the geographic location does not affect the mean rating evolution.

BBB

BB

B

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Triennial Overview: 2007-2009 APPENDIX MORE rating guide General vision A credit rating is an opinion of the general creditworthiness of an obligor (issuer rating), or the creditworthiness of an obligor in respect of a specific debt security, or other financial obligation (issue rating), based on relevant risk factors.

The Multi Objective Rating Evaluation (MORE) model is essentially used to assess the level of distress of industrial companies by using data included in financial statements.

The basic idea of the model is to analyze a set of financial and economic ratios in a predictive corporate bankruptcy model with the purpose of creating a fundamental credit rating model for each industrial sector.

Results of the model are obtained by applying newly developed numerical methodologies, drawing together financial theory, data mining and engineering design methodologies. The heart of MORE is a multi dimensional and multi objective algorithm that produces a classification of each company, by taking into account any attributes (such as sector and country) characterizing a firm.

The model gives the opportunity to assign a rating to a company even without considering a complete data analysis and allows to process quality information. It induces a better understanding of a company’s strength and weakness thanks to sophisticated data mining tools and taking into account the analysts’ knowledge.

The MORE rating vision is to look at the fundamental economics of the company. The main idea is to evaluate the rating observing every aspect of the economical and financial behavior of the company: better is the equilibrium between the different aspects, better will be the final rating.

This is done studying, evaluating and aggregating the most important sections of the financial and economic behavior of a company as: profitability, liquidity, solvency, interest coverage and efficiency.

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Triennial Overview: 2007-2009 Rating scale Rating class

Rating Macro class

The company's capacity to meet its financial commitments is extremely strong. The company shows an excellent economic and financial flow and fund equilibrium

AAA

AA

Assessment

Healthy

The company has very strong creditworthiness. It also has a good capital structure and economic and financial equilibrium. Difference from 'AAA' is slight The company has a high solvency. The company is however more susceptible to the adverse effects of changes in circumstances and economic conditions than companies in higher rated categories

A

Capital structure and economic equilibrium are considered adequate. The company's capacity to meet its financial commitments could be affected by serious unfavourable events

BBB Equilibrated BB

A company rated 'BB' is more vulnerable than companies rated 'BBB'.

Furthermore the company faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions

B

The company presents vulnerable signals with regard to its fundamentals.

Adverse business, financial, or economic conditions will be likely to impair the company's capacity or willingness to meet its financial commitments Vulnerable

CCC

The company shows signals of high vulnerability. In the event of adverse market and economic conditions, the company's strong disequilibrium could increase

CC

C

D

A company rated 'CCC' has a dangerous disequilibrium on the capital structure and on its economic and financial fundamentals. Adverse market events and an inadequate management could affect with high probability the company's solvency

Risky

The company shows considerable pathological situations. The company's capacity to meet its financial commitments is very low The company has not any longer the capacity to meet its financial commitments

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Triennial Overview: 2007-2009 Fundamental Credit Rating Ratios Solvency ratios Leverage ratio Assets to debt Financial ratios Fixed Assets coverage ratio

Measures the level of total liabilities of the company in comparison with equity Indicates company’s solvency. The company shows a level of deficit when the value of this ratio is under one unit Only for holdings. It measures the capital structure i.e. whether a company covers the fixed assets with long term capital.

Liquidity ratios Current ratio Quick ratio Profitability and economic ratios Return on Investment (ROI) Return on Equity(ROE) Asset turnover

Profit margin Interest coverage ratio Interest Paid coverage

The current ratio measures whether a company has sufficient short-term assets to cover its short-term liabilities.

The quick ratio compares current liabilities only to those assets that can be readily turned into cash.

It measures the profitability of company investments without regard to the way the investment is financed.

It measures the profitability of the equity.

It indicates the investments turnover with regard to sales. The level assumed from the ratio depends on the sector in which the company operates.

It indicates the profitability of the sales.

Indicate the ability of the company to cover interest expenses through the economic margins (Gross profit and EBIT) and through the cash flow from operating activities.

modeFinance AREA Science Park Padriciano 99 34012 Trieste ITALY

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Triennial Overview: 2007-2009

mF Credit Limit mF Credit limit is the estimation of the amount of maximum credit that is possible to assign on a commercial relationship with the analyzed company with an outlook of one year. modeFinance used the following values associated with the company analyzed while computing the credit limit:

     

Size; Years in Business; Average number of suppliers; Liquidity of the company and the comparison with its sector;; The funds dedicated to be paid to suppliers; The likelihood that a company may pay its debts in the next 12 months (MORE Ratings).

The credit limit in this report is merely a suggested value of commercial credit limit calculated on the basis of annual public data. This value should be reviewed by paying attention at the Confidence Level value and by using other information such as other business information, news... etc; and private information such as the relationship with client, history of payments, guarantees and the knowledge of the sector.

Probability of default and Confidence Level In addition to the MORE rating, modeFinance also estimates the probability of default and provides a level of confidence. The probability of default is the degree of certainty (in quantitative terms) that the company will go into default.

As the probability of default is strongly affected by the economic climate the company is operating in, companies in the same MORE class will not necessarily have the same probability of default.

The MORE model can produce a MORE rating even if there is missing data by using an associated confidence level:

Confidence 

 Available Information  Total Information

The level of confidence does not indicate financial confidence in the company. It is a reflection of the variations in availability of financial data across Europe due to filing regulations and suggests the degree of financial detail the MORE rating is able to take into account for each company.

For companies with fully populated records a confidence level of 100% would be applied: companies where no financial data is provided, 0%. This puts the MORE rating in a context for the user and aids interpretation.

modeFinance AREA Science Park Padriciano 99 34012 Trieste ITALY

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Triennial Overview: 2007-2009

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