Disclosed pursuant to Article 19 (6) of Regulation (EU) 2020/1503
This description of the methods to assign credit risk grades for crowdfunding projects on the Capitalia Platform is published on the Platform's website. The investors are informed of the changes in the methods by publishing an updated version of this description with the date of the last updates at the top of the webpage. The changes in comparison to the previous version are highlighted in blue for easier understanding. If the changes in methods lead to material changes in the results of the scoring model, an additional explanation is added.
Capitalia at least once in two years updates its credit scoring policies to reflect changes in the performance of the loans depending on their risk characteristics and other appropriate factors. Capitalia has quality assurance procedures in place to periodically verify the correctness and consistency of the application of the credit scores to the issued loans according to the model and the internal policies.
Capitalia assigns each project to be published on the Platform a credit risk score and corresponding risk grade. The project’s credit score is calculated using a judgment-based model, in which statistical measurements are integrated with discretionary elements of decision-making. Capitalia uses an internally developed credit score calculation model. The risk score and risk grade are used to rank projects by the expected loss through the lifecycle of a loan. Capitalia risk grade does not indicate the probability of default but ranks projects in terms of the expected loss.
| Information source | Category of information |
| From the Project owner |
Interim financial reports for the current year with detailed breakdowns of the largest positions; If unaudited financial reports are used for evaluation purposes, the Project owner’s representative is required to attest the truthfulness of the submitted information by their signature. Having the audited financial reports increase the credit score of the project. In addition, Capitalia performs limited validation of the data from the unaudited financial reports by cross-referencing it with other data. |
| From external credit registers | Project owner’s and the guarantor’s credit history |
| From publicly available information |
Project owner's tax payment discipline (tax debts); Media publications and mentions of the Project owner; Comparable companies’ financial ratios; Default statistics by industry |
| From other sources | Project owner' credit history with Capitalia |
The benchmark and weight for each factor are determined by taking into account absolute values and industry’s benchmarks. The values and weights are determined by Capitalia’s experience with companies of a similar size in a respective industry.
| Factor | Metrics |
| Profitability of the crowdfunding project | Net profitability |
| Cash flow generated by the crowdfunding project |
Company turnover (compared to peers) Historical turnover growth rate Working capital to revenue ratios (debtors' days, creditors' days, inventory turnover) Cash flows seasonality variation Debt / EBITDA ratio |
| Leverage, level of indebtedness and solvency of the project owner |
Debt / EBITDA ratio* Equity-to-assets ratio* Liquidity ratio Liquidation value of the assets to liabilities ratio |
| Credit history of the Project owner |
Negative credit history entries in public databases* Credit history record with Capitalia* Tax payment discipline* |
| The availability of collateral and guarantees | Adjusted LTV (if the loan has collateral) |
Total weight of the financial factors in the scoring model result is 90 out of 125. For metrics marked by * , failure to meet the minimum threshold results in the disqualification of the project.
| Input | Metrics |
| Macroeconomic conditions of the jurisdiction where the project will take place | Since Capitalia originates loans only in Latvia, Lithuania, and Estonia, countries with very similar macroeconomic conditions, the factor is not considered in the method to calculate credit scores. |
| Degree of competition of the industry where the project will be developed |
Default rates in the industry of the Project owner; Concentration measure of the company's clients |
| The project owner’s knowledge and experience of the specific sector of its business activity |
Company age (years) Company dependence on key employees (assessment) |
| Project owner’s reputation | Media search results, the record of previous bankruptcies or litigations |
| Other |
Size of the company (number of employees) Employee productivity (revenue per employee) Whether financial reports are audited |
| Financial transparency indicators** |
Transparency of ownership structure Share of transactions with related parties Share of cash transactions |
Total weight of the non-financial factors in the scoring model result is 35 out of 125.
** Financial transparency indicators are taken into account in assessing risks stemming from money laundering and terrorist financing activities.
Using the inputs described in the previous section, Capitalia calculates the credit score of the project in the following sequence:
| Step Sequence | Step description |
| 1 |
Disqualifying factors.
There are some scoring factors (e.g., credit history) for which critical thresholds are set.
|
| 2 |
Calculation of the credit score of the project owner on an unsecured loan basis.
The credit score for the project owner is calculated as a sum of scoring points of all model's metrics, on a scale from 0 to 125 points. Risk scoring assigns each project a credit risk score that indicates the ranking of the project owner's risk as if the credit would be extended to the project owner without collateral or other risk mitigating measures. The step is used as an intermediate step for the calculation of the project's risk score.
|
| 3 |
Calculation of the credit score of the project.
The credit score calculated in the previous step is increased based on the collateral, guarantees, or other risk mitigation measures by 0 to 15 points, but not exceeding 125 points total. The assigned risk score and risk grade are used to rank projects by the expected loss through the lifecycle of a loan.
|
| 4 |
Manual correction of the credit scores
The Investment committee can adjust the credit score by adding or subtracting up to 10 points The Investment committee can adjust the credit score if the committee’s members believe the score does not adequately capture the risk level of the project in terms of qualitative factors of the evaluation or characteristics of the loan collateral. The Investment Committee may also reject the project independently of its credit score if it believes it to be in the best interests of Investors. |
The outputs of Capitalia credit scoring model are:
Assigned risk score and risk grade are used to rank projects by the expected loss through the lifecycle of a loan. Capitalia risk rating does not indicate the probability of default but ranks projects in terms of the expected loss.
Capitalia collects and publishes forecasts on expected default rates for the next period, updating the rates on an annual basis. Qualitative interpretation of each risk grade step reflects the relative riskiness of the loan in the lending segment Capitalia operates in (loans to small and medium enterprises in the Baltic countries). Based on the approved risk score, the following risk grade is assigned:
| Risk score step | Risk grade (credit rating) | Qualitative interpretation of the results | Forward looking expected default rates for the next period (2024) |
| 96+ | A+ (1+) | Extremely low risk + collateral | 5% |
| 90-95 | A (1) | Extremely low-risk | 2% |
| 80-89 | B (2) | Low-risk | 3.5% |
| 70-79 | C (3) | Moderate risk | 5% |
| 60-69 | D (4) | Acceptable risk | 7% |
| 50-59 | E (5) | High risk | |
| Below 50 | N/A | Loan is rejected |
The maximum loan offered to a prospective project owner is set by calculated Accessible Capitalia credit limit. It may be increased by the Investment committee decision by no more than 50%.
The maximum loan duration is not dependent on the project credit scoring results.
The initial risk grade (A+ to E) assigned to systematically assess and determine the viability of the crowdfunding project in terms of risk at the project evaluation stage are not changed during the lifetime of the loan unless serious deterioration of the credit risk of the project is identified. Revaluation of the loans and assignment of an adjusted risk grade are triggered by negative credit events. Adjusted risk grades have different grade steps not overlapping with the initial grade scale described above. Adjusted risk grades are set depending on days late of the loan and other negative credit events. Adjusted risk grades are used for the valuation of a loan.
Capitalia strives to ensure fair and appropriate pricicing for the loans originated on the Platform. This section describes the elements considered in the pricing strategy. The pricing of the loan is set at the level that compensates investors for the risks accepted. Pricing of the individual loan is set by the decision of the Capitalia's Investment Committe based on the pricing model approved by the Board.
| Element considered in the pricing strategy | How it affects the pricing |
| Principal amount of the loan | In general, loan size does not affect interest rate on the loan offered to the investors. However, pricing of the individual loan may be adjusted taking into account demand for the projects by the Platform Investors to make sure that all published projects are successfully financed. |
| Maturity of the loan | The pricing model reflects market interest rates depending on the maturity. In addition. the longer the loan term, the higher the repayment risk. Therefore, the longer the loan term, the higher the interest rate. |
| Time structure of repayment installments | A bullet loan (monthly interest payments, principal repayment at the end of the term) carries a higher repayment risk. Therefore, if the loan has a bullet schedule, it has a higher interest rate. |
| Results of the scoring model | Project's risk category defined as credit risk score (50-100) reflects relative riskiness of the loan and is a major input into pricing. The lower the risk score, the higher interest rate is. |
| Presence of additional guarantee | If the loan is secured with the European Investment Fund guarantee, the interest rate is reduced, compared to the loans with the same risk category and maturity. |
Other factors that might affect the pricing are already included in the credit score calculation model, whose output consequently affects the pricing.
The loan pricing is approved at its origination. The loan interest rate offered to the investors is set according to the pricing strategy described in the previous section.
In addition, project owner pays Capitalia loan issue fee of up to 5% of the loan amount and project management fee of 2.5% to 7% p.a. of the remaining loan balance annual. These fees are covering Capitalia's operating and administrative costs.
Typically, Capitalia does not change loan pricing after the origination. To cover additional costs associated with dealing with late loans, Capitalia withholds as a fee 75% of the late interest paid by the project owners on delinquent loans.
Capitalia charges to the project owners fees fees for changes of loan agreement terms and other additional services according to the Price list publsied on the Capitalia website.
Capitalia is the leading financer for small and medium enterprises in the Baltic sea region. Operating since 2007 we have financed more than 5000 businesses investing over EUR 100 million in their development.
Latvia +371 2880 0880
Lithuania +370 6168 0880
Estonia +372 881 0880Crowdfunding services are provided by Capitalia, SE, operating under authorization from the Bank of Latvia. Investment in crowdfunding projects entails risks, including the risk of partial or entire loss of the money invested.
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