Investment solvency of the Borrowers And Factors of Investment Attractiveness

Lamara Qoqiauri Doctor of Economics, Professor

Astimation of investment solvency.

There are various methods for estimation credit worthiness of the borrower, but it is impossible to use each one for checking ability of covering long-term credit of an enterprise, because during investment crediting prediction of financial status for important period is needed.
For estimation of investment creditworthiness, we must come from financial status of that enterprise, which is going to realize investment project. If it is a firm, then it is purposeful for the investor to continue definition of investment attractiveness. After establishment of current solvency, it must be given quantitative estimation, for example in the diapason from 0 to 1. They establish the marginal meaning of current creditability, down of which it is impossible to have enough solvency due to high level of risks.
Solvency estimation coefficients develop a system of factors. When calculating the system of factors in every specific case, bank specialists take into account the following criterion: the borrower’s solvency dynamics; experience in investment project implementation; manager’s experience in project realization; planning period of the investment project complete realization; quality of the represented business-plan; results of the provided researches; estimation of real investment surrounding.
For considering dynamic of current K1 – solvency of the borrower for previous years, they choose following scale, meaning of coefficient which is established for previous years according to the dynamic of current liquidity:
· It rises permanently and it has been grown for 25% and more (meaning of K1 is 1.4);
· It has been fluctuating, but in whole it has been grown for 25% and more (meaning of K1 is 1.2);
· It has not practically being changed (K1-0.8);
· It has been fluctuating, but in whole it has been decreased for less then 25% (K1-10.6);
· It has been reduced for more then 25% (K1-0.4).
Experience of the enterprise in the realization of investment projects concerns following scale for orientation:
· Analogue project is successfully realized (K1-1.3);
· Less difficult project is successfully realized (K1-1.2);
· There is a negative experience of realization of the investment project during last several years (K1-0.5);
· There is no experience of the investment project’s realization (K1-1.0);
For the planned period of the project realization:
Less then 2 years K1-1.0;
Form 2 till 4 years K1-0.9;
From 4 till 5 years K1-0.7;
More then 5 years K1-0.5.
Experience of top manager of the project realization may be estimated according to the following scale:
· He/she has experience in successful realization of resembling projects (K1-1.4);
· He/she has experience of participation in successful realization of resembling projects and managing enterprise (K1-1.2);
· He/she has experience of successful administration of the enterprise (K1-1.01);
· He/she has experience of managing enterprise for more then two years (K1-1.0);
· He/she has experience of managing enterprise for less then 2 years (K1-0.9);
· He/she has no experience of managing enterprise (K1-0.8);
· Experience of the enterprise administration is not positively estimated (K1-0.5).1
They estimate quality of business-plan of estimation project realization in the interval from 1 (ideal quality of processing) till 0.5 (in case of existence of essential remarks towards it). Only the plan, which is represented in bank for the first time, is estimated in this case.
The specialists estimate results of researches of the bank workers within the interval from 1 till 0.5 according to the results of the research.
After this they calculate and estimate integral indicator of solvency, as multiplication of K1- K6 coefficients. After receiving integral index of the investment solvency they estimate its acceptability for issuing credit and they process questions of improving it together with the borrower.
Briefly about investment attractiveness of the borrower. During estimation of the enterprise solvency desiring to take a credit for project realization examining investment attractiveness of the borrower is an important direction of the analysis. Enterprise attractiveness factors are outer (field of investment sources, location) and inner factors (industrial potential, financial status, management, investment program).
To which field creation of new production or enterprise belongs, is of great importance, because competition ability of production depends on the reputation of the given field at a market of specific country. This may be explained by that priority that is given to all enterprises operating at the market in the specific field.
Location of the enterprise is a determinant factor for the investment attractiveness that is defined by development of concrete region or by the fact, that exactly in some specific location it is possible to provide highest quality of the production and less prime cost. There are such natural-climate conditions in some regions, which prevent or help creation a number of enterprises with competitive abilities. For example, low average annual temperature gives rise to the additional expenses and results additional expenses. This mostly takes place in the warm places. Natural-climate conditions do not influence upon development of such enterprises, which need labor of high qualification. If they are directed towards creation high-technology production and growing level of labor, then formation of enterprises of high competition ability is in perspective.
Influence of industrial potential upon investment solvency. Industrial potential influences straightly upon the investment creditworthiness. Basic and turnover funds, also nonmaterial assets are basic subjects of analyzing. This is the part of the enterprise potential, which is expressed in the volume of capital.
Industrial potential has other elements too, expression of which is impossible in cash form yet. These are the organization levels of labor, management and production, together with intellectual potential of the enterprise. By means of basic and turnover means, nonmaterial assets are operating and goodwill of the firm is created.
During analyzing industrial potential it is necessary to examine existing level of labor and production organization in details, research that industrial mechanism, which is out of the bounds of managing apparatus and center of strategic decisions.
Investor and creditor are obliged to examine every investment project to be financed in the enterprise and the documents comprising the project. This is necessary because realization of every project is reflected on the financial status of the borrower and, accordingly, its creditability.
Traditional methods of securing. There are several traditional types of securing the credit recovery: pawning, guarantee, bank guarantee, which are conditionally called property types of securing. Truly, the specific property of material or cash forms stand behind them. For realization of these types of securing a good legislative base is created. Their legislative regulation is given in the norms of civil code.
Usage of traditional methods of securing is related with analyzing of this credit pawning, which are needed to the borrowers for realization investment project and for making decision about their true quality. In other words, bank officers are obliged to understand, what will happen with the given guarantee in the future. Numbers of factors must be estimated for providing requested analyze. They are: warranty type, the warranting party, concept and conditions of the credit agreement, etc. Quality of warranty means the ability of compensating to the creditors those expenses, which are related with the granted amount and percents added to them. Quality of basic types of provision, as a rule, is degraded in time. There are some occasions, when quality of provision falls down to 0, i.e. loosing of securing occurs. This happens when the depositor refuses his/her obligations or is lost, and the warranty is bankrupted. Longer is the term of the credit, possibility of existence of disadvantageous occasions is higher.
If a warranty is a pawning, its quality may become better of worse. Improvement might take place in the case of real estate, bonds or precious metals type of warranty; i.e. while making decisions about granting long-term credits keeping high quality of provision by traditional methods is always problematic. Consequently, we must discuss possibilities of using provisions of new types.
Information group of the warranty. There is an information group for selecting represented qualified securing for long-term crediting. By receiving objective information about the provision status officers of banks discuss possibility of successful development of the given investment project. This group of methods (Picture 1.) may not be estimated by that concrete cash amount, which may be received by the creditor in case of not returning credit or not receiving punishment established to for the credit.
There are two subgroups from the information types of securing. The first one is competition priorities known in marketing, which have been obtained by the enterprise during operating at a market. Their strengthening points the increased competition ability of the enterprise. Information about these priorities while analyzing cash flows makes idea about the enterprise. However, the competition priorities are more stabile indices for a long-term and they are not changed in short period of time.
Second subgroup represents that data about realization of the investment project. There are information about investment project, its technical-economical statement, results of the researching borrower, analyzes provided in the business-plan. During analyzes of the future business-plan due attention should be paid to the quality of marketing researches checking prime cost, possibility of timely realization of the project. Due regard should be given to the prime cost of the production and consumer features, as the two factors of future product competitiveness.
Insufficiency of material type securing represented in the bank must not become reason for refusing granting credit in the case, if there is the possibility for estimating and analyzing existed types of investment securing.
Recommended literature
Downes J., Coodman J.E. Dictionary of Finance and Investment Terms. Barron‘s Edicational Series, inc. New York. 1995.
Dubash, Jagannath. Futures and Options. Financial World, august 23, 1988. gv. 24-30.
Elton E.J., Gruber M.J. Modern Portfolio Theory and Investment Analysis. John Wiley & Sons, Inc., 1991.
Hanger, Bruce. Commaodities: A Shift Away From Tradirional Plays. Financial World, April 19, 1987. gv. 46-54.
Haugen R. A. Modern Investment Theory. Prentle Hall, 1997.
hickman B.G. Investment Demand and U.S. Economic Crowth. Washindton. 1965. gv. 11-210.
Qoqiauri l. Theoretical Genesis of Investments, New york. 2009. gv. 505-511.