What are risk classes and how are they determined?
FundingPartner divides all loans into risk classes, categorised as A, B and C. Risk class A indicates the lowest risk, while risk class C indicates the highest risk. The risk classes are closely linked to the interest rate level on the loans, and the higher the interest rate, the higher the typical risk.
Risk class is derived from two factors. The first is the probability that a company will go bankrupt or default on its debt. The second is how much one expects to be able to recover if the debt is defaulted on, which is often closely linked to the collateral provided for the loan. When you multiply these figures together, you obtain an expected loss rate. If, for example, the probability of default is 5%, and the loss if the loan defaults is 20%, the expected loss will be 1%. As risk class is determined by these two factors, there can be a wide spread between which loans receive a given risk class. For example, a company with a stable and secure cash flow but little collateral may receive a good risk class because the probability of default is low. On the other hand, a property company may have a higher probability of default, but still have a good risk class since the collateral provided is strong. Below are the expected loss figures that FundingPartner aims for.
| Risk class | Expected loss rate |
|---|---|
| A | < 0.5% |
| B | 0.5% to 1.5% |
| C | 1.5% to 3.0% |
This is only a target, and loss rates may vary. It is also important to remember that the loss rate applies to an average of all loans. There may be large individual differences in the loss rate for individual loans, which may end up with a 100% loss.
For loans brokered from 2021 to September 2023, the statistics for the various risk classes have been as shown in the table below. The statistics were extracted in September 2023 for the analysis. Note that this is only a snapshot, and that the loss rate is not final, as collection is still ongoing for certain loans.
Statistics for risk classes
| Risk category | Average interest rate | Default rate | Amount collected | Amount under collection | Amount lost | Loss rate |
|---|---|---|---|---|---|---|
| A | 8.0% | 0.0% | 0% | 0% | 0% | 0.0% |
| B | 10.2% | 0.1% | 100% | 0% | 0% | 0.0% |
| C | 12.3% | 8.0% | 74% | 25% | 1% | 0.1% |
* The ratios are calculated on a volume basis in kroner; for example, the default rate is calculated as the number of kroner in default divided by the number of kroner arranged in loans.
As you can see from the statistics above, the default rate is highest in risk class C and lowest in risk class A. At the same time, the interest rate is highest in risk class C, to compensate for a higher default and loss rate. Even though the default rate in risk class C is 8%, 74% of these have already been recovered. This means that if nothing were to be recovered from the remaining 25% under collection, the loss rate would be 2.1%. The difference in average interest rate between risk class B and C is also 2.1%.
Read more
Webinar – Risk Classification and Risk Assessment
Many investors want to hear more about risk classes on loans and the assessments behind them. We therefore held a webinar on 25 January 2024 where we shared more about how FundingPartner classifies loans and what underpins the risk assessment. In addition, we reviewed statistics and results for 2023.
