What are the risks of investing in Qred's preferred shares?
Qred Holding AB (publ) ("Qred" or the "Company") conducts, through subsidiaries, operations in the Nordic region in corporate loans to small businesses.
Investing in preference shares carries a risk. The invested amount is not covered by the Deposit Guarantee Act (1995:1571) and may be lost in the event of the Company's insolvency.
A number of factors may affect Qred's business, either directly or indirectly. Below is a summary of the risk factors and material conditions that are considered relevant to Qred's operations and future development.
Credit risk refers to the risk that Qred will not receive payment as agreed. Qred is therefore at risk of making a loss on the counterparty's inability to meet its obligations.
The credit risk related to Qred's accounts receivable is spread across a large number of customers, with relatively small amounts. In addition, the credits have a relatively short maturity, often up to 12 months. By limiting the amount of loans and the maturity, the company limits its credit risk. In order to further reduce the risk, Qred always requires at least one guarantee with personal obligation as collateral for each loan.
The Board of Directors has overall responsibility for Qred's credit risk exposure. Qred's lending is characterized by high goals in terms of quality, control, ethics and morality. Qred has an internal lending policy with, among other things, an advanced algorithm to ensure compliance with the desired risk profile on the loan portfolio. There is a risk that the algorithm, which is based on historical performance, will not produce the desired result or that there will be deficiencies in manual hand-laying. Qred mitigates the risk by constantly monitoring credit losses, training staff and improving processes and systems.
Qred is also constantly exposed to a fraud risk. This is countered by the fact that all customers must identify themselves electronically before a loan can be paid out. Internal processes and constant training of staff further counteract the risk.
The credit risk constitutes the single largest risk exposure for the company. Qred's credit losses are commercially justifiable in relation to the company's revenues and fees. Because the credit risk is spread over a relatively large number of independent small companies, the total credit losses become relatively predictable.
Liquidity risk is the risk that Qred will not be able to meet its payment obligations at each due date. Qred ensures that there is always sufficient cash and the possibility to increase the available funding. Liquidity is monitored on an ongoing basis and stress tests are carried out for different scenarios. Qred has liquidity management that provides good payment readiness in the short and long term. Qred has great opportunities to control liquidity by adjusting its lending.
Qred does not grant credit limits for future use. This means that Qred could very quickly cut back on lending in the event of a stressed liquidity scenario.
Market risk is the risk of loss as a result of unfavourable market prices. This includes the risk of loss as a result of changes in interest rates and exchange rates. Qred has limited market risks, see further below.
Interest rate risk
Interest rate risk refers to the risk that changes in market interest rates will negatively affect the company's net interest income. Qred's interest rate risk results from the company conducting lending activities while borrowing money from investors and other financial companies. This results in the Company conducting lending and deposits with different fixed interest periods (a common example is when a company finances itself at a short interest rate but lends money with a longer fixed interest period). However, most of Qred's borrowings are made at longer maturities than lending. This allows Qred to quickly transition to changing market conditions. The company's net interest income is large, which means that a major change in the deposit rate would not significantly affect the company's profitability.
Qred's lending rate is fixed over the maturity of the credit, and a general increase in interest rates may in the short term negatively affect the Company.
Currency risk is the risk that the change in exchange rates will affect the income statement. This can be done through transaction exposure when sales and purchases are in different currencies, or as translation exposure, when the results of branches in different currencies are converted to SEK. Qred's accounting currency is SEK. The company also operates in Denmark and Finland, and owns assets in EUR. Sharp currency fluctuations can be negative for the Company. The company is mainly financed in SEK. The company strives to borrow money in the same currency as is lent at the same time as the company has a commercial currency exposure.
The credit management industry is adversely affected by a worsening economy. Qred is relatively well placed to face a worsening economy, as maturities on issued credits are relatively short. Risks linked to changes in cyclical conditions are managed through an ongoing dialogue with the respective country management and through regular reconciliations regarding developments in each country.
Operational risk includes the risk that errors or other deficiencies in administrative procedures lead to unexpected financial losses or negative publicity. Operational risks can be caused by, for example, failed internal processes or flawed systems. In order to ensure effective management of operational risks, Qred has established an internal regulatory framework with instructions and policies for employees. In addition, the essential processes of the business are documented and the risks associated with these are analysed. In developing the processes, the focus is on analysis of events related to potential operational risk and other warning signals.
Qred relies on a well-functioning IT system. IT attacks or other network disruptions can negatively impact the company, both through lost time and an increased risk of transactional failure.
Operational risk also refers to external events and legal risks. Qred operates in several Nordic countries with some differences in legislation and tax law regulations. As Qred is a registered financial institution, the company is also responsible for ensuring that the business is operated in accordance with the Anti-Money Laundering and Terrorist Financing Act (2017:630). In order to increase control, Qred has appointed an internal compliance function that monitors rules and regulations in financial operations and is responsible for reporting obligations in connection with the Money Laundering Act. There is also a risk that future legislation will adversely affect the company's operations.
Overall, Qred counteracts operational risks through the maintenance of good internal control. For example, there shall be appropriate procedures and instructions, a clear division of labour and well-functioning information security. Qred also works continuously to inform and train its staff on operational risk issues and the company's goal is to convey and maintain a healthy risk culture.
Finally, Qred's success depends to a large extent on the ability to recruit, retain and develop qualified executives and other key personnel. The company therefore works continuously to ensure programs and initiatives for personnel development and incentives for key employees.
Business risk includes the risk that the company's revenues will decrease and not be able to cover the costs of the business. Business risk also includes strategic and reputational risk, but also the risk that customers opt out of Qred corporate loans for the benefit of other players in the market.
The strategic risk includes risks that may affect the company's earnings in the long term, caused by incorrect or non-business decisions. Qred manages the strategic risk at board and management level through recruitment of competent staff and regular meetings where strategic issues are addressed.
The reputational risk includes the risk that the company's name and brand will be negatively affected, resulting in a negative effect on the company's operations and income statement. Qred manages reputational risk primarily by being responsive to criticism and complaints, as well as training staff and processes for approving major changes in the business. The company today has a history of very good company reviews and the company builds a strong culture around customer service.
Furthermore, see the company's annual report for additional risks.