We know perfectly while conducting a financial analysis/credit risk assessment of a business entity, the professionals are fairly eager to know about “Shareholders” and “Subsidiaries”. Who are the shareholders of the company being analyzed? Is it a person or a Limited Liability Company or a Corporate? What are the key points to check out for each case? The truth of the matter is, you can find the answers of your questions only through Group Companies Analysis. The case can be something like this:
In case the shareholders are real person:
If this is the case, we naturally expect to see a profile (shareholder) with sufficient capabilities & features to manage the company well. What are these features then? For instance: the age, yes the age is an important indicator. If one iron&steel industry representative company’s one of the biggest shareholder is a young person at the age of 20 without any experience, this might bring some question marks. Indeed, in case of a crisis, e.g. if the company has had difficulties in paying its creditors lately, not always the solutions created by a young/inexperienced shareholder might be the best ones. Education also is a good indicator.
In case the shareholders/subsidiaries are legal personalities (companies):
If one is interested in analyzing a group of companies, sometimes relations can be really complicated. Commonly there are so many controlled companies under the parent companies since because nowadays the companies can form subsidiaries for different motivations such as broadening the scale of the business and decreasing the risk by spreading it. Thereby while analyzing the companies, the information such as how many years it has been operating in the sector, detailed contact information cannot be always adequate. In addition to this information, black records, litigation details, unpaid debt debts or mortgage details are also significant for a complete evaluation. Well for most of the cases if there are some negative records, it means that we have already been a bit late. So, before arriving this point, it would be a better idea to comprehend the company from all aspects that we would not need to cry after watching the black records or unpaid debts details. Where do I want to arrive? While checking a company’s creditworthiness and financial soundness, we also need to know the shareholders and subsidiaries well as they are the “team” members. Companies are really like teams, if one player fails, the whole team can fail. Let’s have a look at this example: Here, we see a group of companies whose holding (composed of three shareholders) is operating in textile industry which lately has suffered from soaring debts actually. In the last two years, the group has had important reorganization as many shares in major subsidiaries have been sold out. The group companies’ credit ratings range between CCC to C and generally most of them show high levels of liabilities, low credit ratings and one is already in Liquidation. When the details of the changes in the group structure were analyzed deeply, it has been found out, due to a high level of indebtness of the group in recent years, a sharp and constant group reorganization has been needed. By this way the management could succeed lowering such indebtness and how did they succeed it? : by selling out several control stakes in the major stakeholders. Did they really succeed it? not really because both parent company and the other group members still suffer from soaring debts.
Here is another example to illustrate the possible risk carrying results when analyzing a company which apparently has not had serious financial problems yet. The MORE ratings assigned to this subject company is BB in 2012, however when observed the shareholders and subsidiaries, it can be stated they are not as safe as the subject company. The subsidiaries which are 100 per cent owned by the subject company are assigned with either C or CC MORE rating class. Would you not be willing to have a deeper look to these companies? Yes it is true that subsidiary and the parent companies are separate legal personalities; but as in this case being owner of the shares by 100%, the parent company may have some extra responsibilities; i.e. it may have to pay its debts instead of subsidiary company or maybe banks may not that willing to open a credit line to these subsidiaries without having the guarantee from the parent company. Even both parent and subsidiary company would share liabilities incurred by either. Now, do you literally know the company that you are dealing with or about to deal with? Because maybe what you see is just the tip of the iceberg.