Initial risk assessment
The risk assessment starts with comprehensive due diligence at the start of the relationship with a borrower, which then follows a quarterly cadence, meaning that each quarter we follow up on the risk and monitor any changes.
The initial risk assessment captures observations made during due diligence, potential risks connected to those observations, mitigations to prevent such risks from materialising, and lastly, what we call the residual risk towards our investors.
Residual risk
Residual risk is observed risks that we are not able to mitigate and thus remain as part of the risk taken when investing in the loan. The residual risk is described in short and illustrated by a risk level from low to high on the specific loan, with ‘A’ being the lowest possible risk and ‘C’ being the highest possible risk for a listed loan. Loans can have a rating of ‘D’ or 'E'; however, these are not available for investment due to the level of risk.
Our risk assessment covers the below residual risk categories, each of which is assigned a certain weight in the final risk score, as detailed in parentheses. The total risk score is calculated by adding up the weighted scores for each of the risks listed below.
Operational risk (20%)
When assessing the operational risk of the company, we focus on the borrower's experience and track record in managing assets, technical competency and efficiency. We also look at the borrower's ability to conduct assessments of new off-takers as well as internal procedures around the environment and safety work of the borrower.
Portfolio risk (30%)
When assessing portfolio risk, we concentrate on the portfolio of projects or equipment being financed and how reliable the cash flows generated by those assets are over time. We also look at the creditworthiness of the off-takers and how diversified the portfolio is.Financial risk (30%)
In financial risk, we focus on three areas: ability to service debt, currency exposure and repatriation of funds. The main assessment is to forecast the revenues and costs of assets over time in order to simulate the ability of the borrower to service debt in both the short and long term. As part of this assessment, a sensitivity analysis is also conducted for us to determine how resilient the borrower is to changes in revenues and costs.
Technical risk (5%)
The technical risk focuses on the quality of installations as well as the choice of equipment and maintenance of such equipment.
Sponsor risk (10%)
The sponsor is the group or investor owning the equity in the projects. We do assess the key decision makers of the company and their experience, as well as what type of equity investors are involved and if they will be able to provide continuous support.
Country risk (5%)
A country assessment is conducted to determine the market conditions and their effect on the proposed transaction. We look at different areas, including market potential, ease of doing business, credit rating, contract enforceability, regulatory risk, political risk, macroeconomic risk, and FX risk.
How does the Company assess borrower risk?
The risk assessment process involves weighting each of the above categories and assigning a risk level (Low - 3, Medium - 2, High - 1). These are then converted into a percentage, where a higher percentage indicates a lower risk and a low percentage indicates a high risk. These scores are converted into letter-based categories to reflect the level of detail in the assessment.
80-100%: A
67-80%: B
50-67%: C
33-50%: D
0-33%: E
The investment manager conducts the initial assessment, which is reviewed quarterly by the investment lead to ensure consistency. The final decision on whether a borrower is allowed on the platform is made by the company's investment committee.
Quarterly review
Trine puts long-term relationships with borrowers at the forefront. It has therefore been important for us to develop a comprehensive ongoing monitoring of our portfolio as we disburse funds to borrowers over an extended period of time. This ensures that we always have an updated view of their performance.
Our quarterly review of borrowers consists of a report request sent by Trine to the borrower containing financial and general operational updates for the company. This is assessed together with a quarterly update meeting with the borrower to produce an updated quarterly assessment where we identify any potential risk we want to monitor closer for the next quarter.
Updates and governance
The risk assessment is updated at least annually as part of the annual review of the credit policy and is adopted by the Board of Directors of Trine. The risk assessment is continuously updated and improved based on the data we collect on our portfolio and the market in general.
If you would like to learn more about our credit assessment and pricing, including our credit policy, feel free to send us an email at hello@trine.com.