Holding/Parent Company Credit Rating

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Holding/Parent Companies with no operating assets should not have a credit rating of B "Highly Speculative junk bond" unless their combined value with subsidiaries is in bad shape and are truly junk.

A Parent companies Credit Rating should be determined by risk weighting the value of the assets and earnings/cash flows they can borrow against. A parent company should have the ability to borrow some money at reasonable rates but most likely not as much as an operating company.

• General Concept of Parent Company Risk Rating:

o Assets and earnings/cash flows that you control and/or are less volatile should have high value.

o Assets and earnings/cash flows that you lack control over and/or their values are more volatile should be discounted significantly.

o Potential Borrowing Capacity:
- Parent Company: 25% Asset Value, ~35% of Risk Weighted Assets
- Operating Company: 50% of Asset Value

o Reasonable Interest Coverage:
- Parent Company: 2-3+ Times Risk Adjusted Earnings/Cash Flow
- Operating Company: 2-3+ Times Earnings/Cash Flow

• Asset Risk Rating:

o Financial Assets:
- Publicly Traded Stock (70% FMV), stocks can go down 20%-30%+ in any given year because of market volatility like the current virus situation going on.
- Private Companies (70% FMV or 80%-100% Book Value), private company earnings-based values can go down 20%-30%+ in any given year because of market volatility. A subsidiary could demolish assets or have a bad year and impair a portion of its book value.
- Investment Grade Corporate Bonds (90%-95% FMV), small default risk probability
- Government Bonds (95%-100% FMV), little or no default risk
- Cash (100% FMV)

o Business Assets: Valued Same as Operating Company
- Land and Natural Resources
- Inventory and Business Assets
- Intangible Asset Technology
- Etc.

• Earnings/Cash Flow Risk Rating:

o Financial Assets:
- Controlled Company Earnings: 50.1%+ Ownership of Publicly Traded Stock or Private Companies where you can set dividend (35%-67% Earnings), A safe company dividend is typically between 1/3 to 2/3 of a company’s earnings
- Minority Company Owner Earnings: Less than 50.1%+ Ownership of Publicly Traded Stock or Private Companies where you cannot set dividend (0%-35% Earnings), no control over the cash flow
- Investment Grade Corporate Bonds (90%-95% Interest Earnings), interest income should be steady with small default risk probability
- Government Bonds (95%-100% Interest Earnings), interest income should be steady with little or no default risk
- Bank Cash (95%-100% Interest Earnings), interest income should be steady

o Earnings from Business Assets: Valued Same as Operating Company