Cofinancing of businesses with Capitalia should be used by lenders who are interested and are capable to independently conduct financial analysis of a company, as well as evaluate other operating aspects of a business, understanding risks associated with lending to such enterprises. Capitalia suggests lenders to following these principles when making lending decisions:
Capitalia prepares credit assessment of each borrower based on our extensive experience of financing over 1,000 businesses in the Baltic States during the last 10 years. The credit rating is calculated taking into account over 50 data points, including analysis of the cash flow, tax payment discipline, operating financials, industry characteristics and other aspects of the business. After the calculation of the scoring result, each business is evaluated by an experienced investment committee that assigns the final risk grade of the company. Default risk and loan loss probabilities are calculated based on historical performance of Capitalia's portfolio during the time period from 2014-2017 and are summarised in the following table:
|Description||Probability of loan loss*|
|A+ (96+)||Extremely low risk + collateral||0.5%|
|A (90 - 95)||Extremely low risk||1.4%|
|B (80 - 89)||Very low risk||2.4%|
|C (70 - 79)||Low risk||3.6%|
|D (60 - 69)||Moderate risk||5.4%|
|E (50 - 59)||Acceptable risk||7.5%|
* Based on the statistics of loans issued by Capitalia for the period from 2017 to 2018
To minimize loan default risks, following funding of a company Capitalia performs regular monitoring of the borrower. Such monitoring measures include, inter alia, control of tax payment discipline, credit history, changes in official management and official registration information. For companies that are late on regular payment over 15 days Capitalia requests bank account details and, if deemed necessary, operating financial data in order to evaluate underlying operating situation.
Internal conflicts of interest prevention policy of Capitalia details how companies related to any of employees are identified. Capitalia does not provide financing to any businesses that have conflict of interest with any of the employees, owners, council or board members, unless person with that conflict of interest is in no way involved in evaluation or management of the investment in the said company.
Losses that could ensue due to lending to businesses via cofinancing are not insured or otherwise protected like such would be in case of deposit in a bank. Based on over 10 years of experience in funding companies, Capitalia conduct detailed evaluation and monitoring of the funded companies. However, any issued loan can default and become unrecoverable, including loss of any accrued interest and penalties on such a loan. Capitalia does not take responsibility for such financial losses that may arise to the lenders through cofinancing. The following sections detail main (but not all) of the risks that may be relevant in financing small and medium sized businesses.
Capitalia offers lenders to cofinance small and medium sized businesses in the Baltic States and near region. Latvian, Estonian and Lithuanian economies have experienced stable and regular growth since year 2010. Lenders should take into account the cyclical nature of the economies as a result of which a contraction of the gross national product can be expected. Due to close links of the global economies often such economic slumps are not limited to a single country but are regional or global in nature. Large and export oriented businesses are typically better able to adjust to negative effects of market risk than locally operating and small companies.
Operational risk is non-financial risk that is related to insufficient or unsuccessful internal processes, poor personnel performance and external circumstances that can lead to financial problems of the company. To the extent possible Capitalia evaluates and outlines identified operating risks of each company, however, lenders should conduct independent evaluation of such risks, if necessary, by requesting further information from Capitalia.
Credit risk is exposure to potential losses in case if a borrower is unable to pay their contractual obligations to the lenders. Credit risk can arise also for businesses that have successful and profitable operations if they work with insufficient working capital liquidity or is unable to re-finance maturing debt liabilities. Credit risk has to be particularly considered in situations when loan principal repayment is scheduled for the end of the term as opposed to regular amortisation schedule. Lender has to understand how will the company be able to repay the lump-sum debt obligations at the end of the contracted term.
Loans to companies may carry asset collateral and/or personal warranty of the owner or manager. Although Capitalia performs all reasonable assessments on the value of the collateral, its liquidity and other security aspects, lender has to take into account that in the event of default unforeseeable difficulties to identify, gain control of and sell the collateral may occur. Furthermore, in case of forced realisation of the collateral it may differ from the previously determined market value. Such situation is more likely to occur if the collateralized asset has low liquidity (small number of potential buyers).
Lenders should understand that financed loans are not liquid financial investments and should account that the loan will be in returned in line with the repayment schedule as agreed with the borrower. Within its possibilities Capitalia may (but is not obliged to) offer to lenders opportunities to sell their claims to Capitalia or other investors.