Tutorial/1.5/Expert Knowledge/Bankruptcy Loans

From AirlineSimPedia

Contents 1 Inability to pay 2 Credit System 2.1 Preface 2.2 Loans without securities 2.3 Loans with securities 3 Rating 3.1 Impact of Ratings 3.2 Rating Evaluation 4 Prime rate

Inability to pay

Inability to pay or insolvency means that a natural person or legal entity isn't able to pay it's costs and bills through it's own cash-flow, i.e. regular income isn't sufficient to pay the regular costs. In most of such cases also the credit limit is used up. Often this ends in giving up the company and ceasing commercial operation.

In Airlinesim the balance of the bank account is the criteria to determine when an enterprise isn't able to pay, as there is no overdraft credit to pay leasing installments or salaries from. If you're unable to pay the leasing rate of an aircraft your enterprise is considered inable to pay in that specific moment. Therefore the leasing contract will be immediately terminated, the aircraft is returned to the lessor and the security deposit (minus the leasing rate) is refunded to your bank account. If you're unable to pay for the salaries of your employees consequences are more serious: If you're enterprise is inable to pay during week-end closing the enterprise will be liquidated.

Therefore it's a regular danger that due to inobservance or miscalculation by the user even an healthy enterprise can become unable to pay. It's an important advise to calculate accurate and try to have some cash on your bank account plus try to build some reserves, if your enterprise is making profit. Also a Timetable helps you to oversee your fix costs (leasing rates, ground handling), loans and salaries plus predicted dividend payout.

If an enterprise is liquidated due to inability to pay at the time of week-end closing or if the enterprise is given up in the meantime, it'll be liquidated as follows:

• Aircrafts are returned to the lessor (security deposit is refunded minus leasing costs) or marketed.
• Employees are layed-off (salaries plus compensation are payed)
• Loans payed off (interests are calculate pro rata)

The amount being left over are liquidation is payed out to the superordinate enterprise, the liquidation is finished.

Credit System

Preface

In Airlinesim loans are managed and payed out by the AS-Bank. The creditworthness and therefore maximal sum of loans you're offered and the corresponding interest are affected by different factors:

• Rating of your enterprise
• Amount of equity
• Amount of already signed loans
• Amount of profit

In intervals of seven days after signing the loan contract the loan and interest has to be payed in rates. You can opt to dissolve the loan contract at any time - if the balance of your bank account allows to immediately settle the loan plus an additional fee.

In Airlinesim we do decide between loans with or without securities.

Loans without securities

Loans without securites allow you to raise your liquidity. If you sign a loan contract on the menu 'Finance/Loans' this equals to a loan without securites. Your loan isn't bound to any invests you plan, but the interested is a bit higher compared to a loan with securites. The specific interest for a loan without securites depends on the current prime rate, but can be higher depending on your creditworthness.

Loans with securities

Loans with securities are always bound to a specific invest and won't raise the liquidity of your enterprise, therefore this is somewhat equals to a financed purchase. The specific object you invested in is used to safeguard your loan. In case of illiquiditiy it is passed into the AS-Banks ownership. Given that the AS-Bank is willing to offer higher loans and subordinate interests compared to a loan without securites. Also in that case the specific interest for a loan without securites depends on the current prime rate, but can be higher depending on your creditworthness.

Loans with securities in Airlinesim are only offered when buying a new aircraft.

Rating

Rating is a term from the finance world. Rating steps are named in order depending on your creditworthness, in which AAA is the best rating you can get and D is worse.

AAA - AA - A - BBB - BB - B - CCC - CC - C - CI - D

Impact of Ratings

In Airlinesim each enterprise is evaluated in matters of creditworthness. This rating is published and visible to each user. The rating is updated after each transaction which may affect your creditworthness.

Your rating, meaning your creditworthness, influences three important parts of our game:

Leasing and financed purchase of Aircrafts from AS-Enterprises as a lessor or bank

If you want to lease an Aircraft from an AS enterprise or purchase an Aircraft financed by the AS-Bank, your rating must be at least B or better. Sometimes - depending on specific values - even a Rating of BB isn't sufficient. If an Aircraft is leased from another Lessor (i.e. another User) your rating doesn't matter and would allow you to lease an aircraft thought your Rating equals CCC.

Loans: Interest (and difference compared to the the prime rate) and maximal sum of loans

The worse your rating, the lower is the maximal sum of loans you're offered and the more the interest differs from the prime rate. Usually the AS-Bank won't offer you any new loans when your Rating is CCC or even worse. Depending on the debt to equity ratio you're usually not even offered new loans with a B rating.

Initial Public Offer (IPO)

An Initial Public Offer (IPO) isn't possible if your rating is BBB or worse. Also consider that potential investor will take a look at your rating. An IPO with a minimum rating of A or a marginally better might frighten off potential investors. The better your rating, the better your impression.

Rating Evaluation

The rating is calculated from several financial parameters of the evaluated enterprise, but the exact formula is confidential. One parameter is for example your equity to debt ratio, your loans. Also the predicted cash-flow does influence the rating. Several other parameters as follows are evaluated:

Cash Flow

Is the net gain in a fixed period. In Airlinesim this is simplified as the profit from your profit- and loss statement, minus write-offs.

Cash reserve

The amount of freely available capital on your bank account

equity-to-fixed-assets ratio

The equity-to-fixed-assets ratio describes the ratio between asseats (in Airlinesim your flight equipment account, security deposits plus (optional) buildings) and your net equity. In theory there exist three ratios, in Airlinesim the first ratio is used. It is evaluated as follows:

equity-to-fixed-assets ratio = equity/assets x 100.

Equity ratio

Is the amount of own cash (including those of your shareholders) in your enterprise, loans for example are considered debt capital. Example: The total assets amount of balance sheet of company X is 100 Mio AS $, Loans 35,5 Mio AS $, therefore a equity ratio auf 64,5% is calculated.

return on equity (ROE)

Is the yield of the used capital in a specific timeframe and describes how much money an airline does gain from the available net equity. The ratio is calculated as follows: return on equity = profit / net equity x 100.

Cash Ratio

The Cash Ratio describes the short-term ability to meet financial obligations, calculated as follows: Cash Ratio = liquid assets (in Airlinesim AS cash on your bank account) / short-term debts (in AS all regularly payments like salaries, leasing rates, ...)

Current Ratio

Same as cash ratio, but in this case also current assets (liquid assets plus security deposits) are considered luquid assets.

Profit margin

Percentaged profit from earnings (in Airlinesim in a week). Calculated as follows: Profit margin = Profit / Earnings x 100

Debt ratio

Part of loans compared to your total assets, somewhat the opposite of your profit margin. Calculated as follows: Debt ratio = Loans / equity x 100

Prime rate

In reality the responsible central banking authority defines prime rates in given intervals.

In Airlinesim prime rates are adjusted to the current development of a game-world and therefore can perish some larger and often up- and downturns, compared to reality. Prime reates may change several times a day, prime rates in Airlinesim aren't written in stone.

On the frontpage of every game-world two prime rates are shown, one for loans without securities and another one for loans with securities. The prime rates stated there require you to have an AAA rating - if your rating is worse the AS-Bank may offer higher interests.