I had started to work as a credit analyst only by a pure chance in a consulting company called General Finance Market on July 2006. Prior to that, I had only a vague idea about credit analysis other than the traditional credit rating procedures which I had learned about it by 1993 while working as a stock analyst in Halkbank. Incidentally, General Finance Market had a job posting on a newspaper requesting a French speaking person to deal with the international correspondence in June 2006. I had applied to this position as well as to a translator position for a company called Emek Pres. I started to work with Emek Pres in the second half of June 2006 but soon I discovered that the company was not paying properly its employees and I started to look around, especially the good news from General Finance Market. On the last week of June, the company called and after a short meeting, I was accepted to the said position.
So, I started to work as a correspondence clerk in General Finance Market. But soon, I realized that their credit analysis department was weak, or virtually non-existent, I would say... I jumped on the opportunity and prepared a report about one of its client companies which the management liked. Before joining the company, I had done some research as to how to make credit analysis as I had only a vague idea about it despite my experience as a stock analyst; I had to concentrate on the short term of the financial analysis with regard to insolvency whereas with stocks, I was looking ahead. Then, I transferred this to my work and the first report was OK as far as the standards were concerned. But I was in need of something more clear cut on the matter.
I turned to a Russian hacker who had access to various sources, including financial ones and asked him whether he could find something about the credit analysis and credit risk assessment. Soon he came up with a bunch of CDs on the matter. It compiled the data of several hundred of thousands of companies together with their risk assessments; it provided a concrete estimate of bankruptcy probability. I took me about a week to work out operational tables for the correct estimation of bankruptcy. At the end, I had developed composite tables for bankruptcy estimation.
Armed with this tool, I went to try it first with some old bankrupt companies that I knew in order to test its effectiveness. One of the companies that I put into the test was Enron and I could determine that it was giving strong signals of bankruptcy as early as 1997 with a probability of 70%. And that figure had reached 80% at the end of 2000. As my confidence on the model grew stronger with the successful testing, I decided to try it on a recent client company which had applied for a credit line. Then I prepared a report of 2 pages at the end of which I stated that the company had 80% probability of going bankrupt. The chairman was furious and dismissed the report as he was trying to strike a deal. In fact, I had paid a visit to the distressed company in Bolu but it was plain to see that things were not going well. 3 weeks after submitting my report, the bad news arrived to General Finance Market: the company had filed for bankruptcy...
The chairman was infuriated and he rushed to my desk and ordered me to do the same work for the other client companies that were on the files. Their number was 140 and it took me about 2 weeks to evaluate them before coming up with a summary report. Out of the 140, only 10 company were eligible to be presented to the banks and among them, only 3 managed to obtain a loan which permitted General Finance Market to obtain good deals.
Basically, the company was saying to the customers that it was not going to take any commissions before obtaining a loan but that there was an expertise report which had to be prepared and be submitted to the bank and it had to be paid. It was with this money that the company was able to meet its administrative expenses. And if the credit line was obtained, then the commission would be collected once the money entered into the accounts.
But in October 2006, one of the company's manager embezzled the money present in the accounts and the company found itself in dire straits. Despite fighting desperately to restore the situation, the management was helpless in front of the angry customers: there was a cat and mouse event going on between the management and the customers...
But this system crashed with the event cited above and thing started to get tough. The company changed its address and continued its operations in a discreet fashion until June 2007. Needless to say, it was a failure...
During this period, General Finance Market had taken contact with Kayseri Sugar Refineries which was in the need of financing its 100 million USD worth residential project in Kayseri. I had prepared the file and submitted to the management who in turn took contact with Credit Suisse who had proposed 10%. The management of Kayseri Sugar Refineries at first was neutral to the proposition and then, the refusal followed. I was at first astonished when I heard about it but later on, the details had arrived: the payment of the loan would be made in 10 equal instalments while the Kayseri Sugar Refineries was expecting a payment in a lump sum (I suspected that they had other intentions for a portion of that money such as buying for themselves some apartments and fancy cars).
The Turkish companies were generally coming up for a loan demand on three matters: the financing of the needs in working capital, debt restructuring and financing of investment projects. In the first one, the banks requested that the amount of the loan should not be more than the quarter of the sales figures and that the deed that was going to be used as a collateral should be worth at least twice the loan. And also, they did not want to see any financial debt in the liabilities and the company must not have unpaid cheques. As far the debt restructuring was concerned, the banks were generally reluctant to finance it as it meant to be a replacement of a group of financial debt by a single bank loan and thus creating a substantial default risk. But the financing of the investment projects was a nightmare because the Turkish banks did not know how to do it; they were considering the loans as commercial loans and consequently, we had to turn to the foreign banks. Apart from all this, I had to deal with the consistency of the companies' financial statements which were not correct most of the time. It is customary to cook the books in Turkey and I had to ask for the real sales figure. There were three ways of altering the sales figure: the first one involved the practice of making the sales without issuing any invoice; the second one involved a correct sales figure but the costs was overstated by the use of fake invoices; the third one involved both.
On July 2007, I started to work with Rehber Consulting in the same position. But things were going bad in the U.S.A. with the subprime mortgage crisis in August 2007. I estimated that we had only two months to work out the deals. But we were not lucky and the opportunity to obtain bank loans for the companies got into great difficulties by November 2007. In March 2008, we missed a big opportunity of restoring our financial situation when a deal of 4 million USD went wrong when the dollar surged in Turkey. In August 2008, the company failed and the following month, I went to Ankara.
In October 2008, I started to work with G&G Consulting as a credit analyst but I got rapidly involved in other matters such as management of the working capital, investment portfolio management and translations. We had a financial crisis brewing in the country and around the world and there could possibly not be any bank loans that could have been obtained from the banks. So, for a while, I managed the portfolio. Then, things started to get better in the summer of 2009 and I started to prepare the loan applications of some companies. Though the results were varying, it was a successful undertaking.
At the same time, I was also working as a part time translator for Keyhan Translation Services starting October 2008. But as the economy was getting into a bad shape, the company's sales dropped by 60% and it had to switch into a payment based on the number of pages instead of paying a fixed salary. Then the owner came to me and asked how he could solve his financial problem. I advised him to do three things: find new customers, collect the receivables and lower tax payments (in other words, provide translation services without issuing any invoice). Under the economic circumstances, the first one was very difficult and the second one had some positive effect while the third one had mitigated results.
Nevertheless, my experience as a credit analyst was quite interesting for my part because I was able to see how things worked in this area. There is a golden rule in the world if finance: what they teach in the books and what you have on marketplace are widely apart. The books are standard theories which are mostly irrelevant when applied to the marketplace. I had realized this when I dealt with the capital markets. And the same thing happened when I dealt with the credit analysis.
When the banks saw my risk evaluation figure in the reports, they had called my employer and asked questions about it such as where I got the figures and wanted the "program". There were no programs other than the composite tables and I never gave them away. I was also using different set of ratios I had invented in order to evaluate certain items of the financial statements and that also was attracting attention.
I did not get involved into details of the statements, especially the balance sheet but nevertheless, I solved the issue by getting from both worlds. It gave me an edge in the analysis. But I still stay away from cash flow analysis despite some attempts to create a straight forward formula. I must admit that I am still the antique type of analyst...
In the fall of 2007, I had met a former regional director of a prominent state owned bank who had a huge network. When I had presented him the works that I had done previously on analysing credit and the relevant issues pertaining into it, he deliberately said that it was bullshit. So, I asked him why.
He said that I did not know finance. I renewed the question and he said the following: "If you know how to obtain a high return with a low or zero risk; if you know ho to obtain a loan with very favourable conditions and if you know how to pay very low or zero tax, you know finance; otherwise you know nothing." Consequently, I asked him to teach me...
One week later, he invited me to a meeting in the Old Bazaar which I had visited many times before. When I arrived there, I met him in one of the currency and gold selling points. There, I met someone who was very knowledgeable concerning the currencies and the the interest rates. We talked a bit and I realized that I was facing something else. Soon, other persons came and I was invited to a place where I would act as a translator for a discussion about the procurement of a foreign loan.
An hour later, I entered a hotel where a Lithuanian woman was waiting. The company in question was Collins Jeans who needed a foreign loan in order to finance a 170 million USD worth residential project and we were about 10 persons attending the meeting. As I had worked upon the file previously, I knew the issue very well. The discussion carried on for 8 hours. The topic was concentrated on the level of the interest rate as well as the commissions. Basically, the World Bank was going to finance this and the Lithuanian lady wanted to secure 2% of commission whereas the group wanted also to have a 2% commission. But the basic interest rate of Turkey was Libor + 3 and at the time of the event, that meant 8 percent + commissions. At the end of the discussion, the figure came out as 11% but the owner of the Collins Jeans rejected the offer.
I had a similar experience in March 2008 when a company we had found in Kahramanmaras wanted to secure a loan of 4 million USD for an investment project. The project in question was a factory for the production of dairy products; the South-eastern Turkey is well know for stock farming and the owners of the projects were quite enthusiastic about it. But after a rapid analysis of its documents, I had found out that they had paid 200.000 USD for a feasibility report which was, for the most part, a copy-paste work...
I took contact with some banks in order to find a loan but the owners had some unpaid cheques which caused some concern. Also, they did not have sufficient real estate that they could present as collateral for the said loan. Then, one of the members of Rehber Consulting took contact with some lawyers who had ties with abroad. Soon, they took contact with a bank in Thailand who accepted to finance the project. Everything was ready for the signature of the agreement where the commission would be 10%; Rehber consulting taking half of it. But 2 days before the signature, the USD jumped in Turkey and the bank cancelled the deal.
There was also the issue of marketing the letters of credit obtained from foreign banks who were about to expire. And I had the task of contacting first the foreign bank in order to ensure that the document was still valid and then transfer it against commission to the customer who was needing it for the financing of its operations. Generally, they started to appear in October and early November and the company who had it in its possession was trying to sell it to someone who could use it right away. But I was intervening as a translator in the whole affair by taking contact with the foreign banks. Despite being a lucrative business where we could earn 1% at the most, it was exhausting and most of the time, there was no result. But, despite that such an event did not really demanded any financial analysis, it nevertheless required some information about the company in question because, at the end, the banks were getting involved.
In another occasion, one of the members of Rehber Consulting called me in for a meeting and said that he needed my assistance regarding a major textile company. The issue was the following: the member was going to procure false invoice to the textile company who was going to use it to inflate its costs and when the financial statements would come out, I was going to prepare a standard report. I told him that the statements were going to be distorted and in such a case, the banks would see that and would refuse to give any loans. The owner said he knew it but this was the way it had to be done.
We went to see textile company and the owner requested a set of false invoices around 200.000 USD. My partner accepted it and I took the documents with me. While returning to the office, he said that the normal charge for a false invoice is 3% and that Rehber would get 7% but the main idea was not to provide him with the invoices but to secure a customer who was in a need of a loan to finance its investments (which turned out to be the company in Kahramanmaras).
The interesting point in this was that I had learned how the system worked. There were some persons who were specialized in preparing these false invoices and depending on the industry, they had a set of false invoices present in the files. All they had to do was to adjust them according to the need. Then, these false invoices were placed in the company's accounts and the owner thus could retrieve the money from the company. The problem to be solved was how much was going to be retrieved in order to avoid the attention of the revenue services. My guess was that the owner would take out the equivalent of the free cash flow and still carry on the business. No wonder why the owners of the companies with high cash flows are rich in terms of real estate...
There were times where some companies could not secure a loan from the banks due their terrible financial state. And we had to find a way to finance them...
The person that I had met (mentioned previously) knew someone in Switzerland who had 350 million USD in the accounts of Credit Suisse. But this person could not use outside of Switzerland and he needed a way to use it (thus laundering it). The Swiss bank would use his money to provide loan, thus act as an intermediary. In return, that portion would be laundered. I was not feeling at ease with the matter but the guy took contact with him and we sent the documents to see what he could do. The result was nil...
But I had learned something about those Swiss banks...
There is at least 60 billion USD present within the accounts of 2 major Swiss banks and belonging to the Turks. Some of them use their money by "obtaining" a loan from these banks and thus evade any problems with the Turkish State. So, I realized that the foreign financial debt present in the liabilities of the Turkish companies was, for the most part, false: they were represent a disguised equity within the company. The amount of money belonging to the Turks which are present outside of Turkey are estimated to, as of 2008, 150 billion USD. And I would suspect it to be now at least 200 billion...
When I arrived to Ankara and started to work in G&G Consulting, my experience proved to be valuable. And I had also managed to gather some interesting information about the finances of Turkey during the 2008-2009 crisis. The underground economy is not 40% as the State is declaring but is the equivalent of the economy. Worse, all the SMEs are in need to perform tax evasion in order to survive in the business because the taxation is heavy compared to the level of their business. Consequently, I always expressed doubts over the financial statements of the SMEs in search of a loan. But, we also had to accept them as they were for it would have been futile to fight over the consistency of these.
Due to the fact that I had some contacts in Istanbul regarding the foreign banks, the Grand Bazaar and the Tahtakale currency market, I could follow what was going on. Also, as I had to follow the world, I was quite aware about what was going on in the finance world abroad.
When 1993, I had pointed to my superiors of the futility of taking into consideration of a group when analysing a company (the famous qualitative factors), I got it wrong in 1994 crisis where Turkey and Mexico had identical credit rating but just because USD backed Mexico with 50 billion USD, only Turkey's credit rating dropped significantly, and then right in 2008 when the banks which had a level credit rating got into trouble when they issued poor quality investment vehicles to the public. When the bubble burst, the relationship between the assets and the value of these investment vehicles disappeared with the relevant consequences. Then their ratings were questioned but soon everyone forgot about it.
To sum it up, imagine you have a Holding whose rating is AAA and one of its companies has a normal rating of BBB. But, just because the company belongs to the Holding, it gets a AAA rating treatment. It is assumed that if something goes wrong with the company, the Holding will pay. In the short term, that may sound like being correct but over the long term, it is the opposite.
No wonder why when some investment projects that the companies undertake in Turkey encounter great difficulties in obtaining a loan. It happens that the foreign banks request a guarantee from the Treasury other wise there would no loans available...
Last word: when the commissions are at stake, the analysis is futile.
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