Key Risks Related to Investments
On this page, we comprehensively outline both the risks associated with Blue Finance Ltd. and those pertaining to investors.
We also discuss how the Company manages risks and endeavours to protect itself from potential risk factors. We hope that this information assists our investors in forming a realistic view of Blue Finance Ltd.
Business-Related Risks
The most important risk of loss in the operations of both Blue Finance and all other credit institutions is related to credit losses. Therefore, credit loss risk management is one of the most important areas of business. Initially, credit loss risk is taken into account in the pricing of products, meaning that the price of products is set at a level that allows for sufficient profit after operational expenses, financing costs, and credit losses. Due to the large number of customers and granted credits, the proportion of credit losses in the total credit portfolio remains relatively constant.
Management
Credit loss risk is managed through customer-specific creditworthiness assessments. Before making a credit decision, the customer’s creditworthiness and ability to pay are verified. In addition to credit and payment default records, factors such as the customer’s income and information on other loans are also checked. The customer’s actual ability to pay is carefully assessed based on the overall picture. Diversification of the credit portfolio across a wide range of customers reduces credit loss risk. Credit loss risk is also managed through the regular sale of uncertain loan receivables to collection agencies, freeing up capital and limiting the risk associated with individual loans.
Liquidity risk, or the risk to the company’s short-term solvency, essentially means that even though the company generates profit and has more receivables than liabilities, the cash on hand may not be sufficient to meet immediate payment obligations. This risk mainly applies to situations where a significant number of loan applications are received in a short period or, alternatively, a significant number of investment redemption notices are received in a short period, and cash reserves are insufficient to meet all immediate obligations.
Management
The company has several ways to maintain good liquidity and sufficient cash reserves. On the financing side, anticipation involves the regular sale of uncertain receivables and the use of debt financing to supplement equity financing. Financing agreements used for the sale of uncertain receivables also allow for the sale of certain receivables, which immediately replenishes cash reserves. A diversified and varied financing base significantly reduces risks associated with B/C/E/F & G shares or debt financing. On the business side, anticipation is evident in the anticipation and planning of marketing activities, allowing for preparation for the growth of customers and loans.
The company operates in a tightly regulated industry, and its operations are affected by changes in legislation related to interest rates, lending, securities markets, and taxation. These changes, as well as risks related to the political operating environment, can hinder the company’s business.
Management
Key management measures for legislative risk include geographical diversification of the product portfolio as well as consumer and corporate loans. The company closely monitors developments in industry legislation and seeks to anticipate and adapt to potential changes.
The COVID-19 pandemic has significantly affected the general economic situation, which may have weakened customers’ solvency. At the same time, legislative risk has become more difficult to predict than before. If during normal times changes in legislation or other key guidelines take a year or more, during the pandemic legislation has changed in a matter of weeks.
Management
The company’s key tools for responding to rapidly changing market conditions are high-performance and flexible technical systems and clear processes for implementing significant product changes in a very short time. The increased credit loss risks due to the pandemic have required an expansion of the assessment of customers’ creditworthiness and ability to pay. It is essential to obtain as up-to-date information as possible on each customer’s actual financial situation. The company has therefore introduced real-time assessment tools and data sources enabling real-time financial situation assessment combined with traditional mathematical models.
Business always involves risks, and we must be prepared to face uncertainties. We cannot guarantee that our operations will always be profitable or that our cash flow will always be positive.
Potential credit losses can affect our financial situation, and fluctuations in market interest rates can affect our business and results.
Management
We invest in long-term planning and focus on developing products and services that meet our customers’ needs and are also financially viable.
The financial situation is closely monitored daily, and information on the balance sheet and income statement is regularly shared with our stakeholders so that they can have a comprehensive understanding of our financial situation.
The reporting of financial information is overseen by an external auditor, Advico Ltd., which belongs to the international audit firm Grant Thornton. This ensures transparency and reliability of financial information.
The company’s operations involve risks related to financing, and it is possible that the company may not be able to obtain the necessary financing on favourable terms or even at all. There is also a risk that the company’s current sources of funding may not be available in the future, which may require seeking new forms of financing.
Management
The company continuously monitors the development of its business and its financing needs. The company actively engages in dialogue with both current and potential financiers, aiming to ensure that various financing options are available when needed.
Share-Related Risks
Investments made in the company are direct investments in Blue Finance Ltd.’s preferred B-/C-/E-/F- or G-series shares, so they are subject to the normal risks associated with stock investments. Investments in shares are also not covered by bank deposit insurance, so there is a risk of capital loss.
Management
The company manages the risk of capital loss by strengthening its financial position in the long term, developing precise business plans, and using financial instruments to minimize market risks.
Investments made in the company are equity investments, which means that a return (dividend) can be paid on the investment only if the company has distributable reserves (free equity). In practice, this means that the company must generate a profit to pay dividends.
The company regularly publishes key figures, which include the accumulated profit for the financial year and also the received investments. Based on these, shareholders can assess the risk related to dividend payments.
Blue Finance’s B/C/E/F & G shares are preferred shares, meaning that B/C/E/F & G shares are always considered before dividends can be paid to founding shareholders.
Management
Turning the business profitable after years of heavy losses is an important first step toward normalizing the situation. Profitable products and profitable operations enable the expansion of the financing base, which in turn allows for the return of investments.
The company’s primary goal is to reach a point where we can pay full dividends to shareholders. The restoration of dividend payment capacity requires that the subsidiary companies of the group have a profitable financial year, enabling them to pay dividends to the parent company, Blue Finance Ltd. With these accumulated profits, Blue Finance Ltd. can pay dividends to preferred shares.
The most significant single item affecting earnings is credit loss provisions. The size of credit loss provisions is influenced, among other things, by changing legislation and legal practice as well as the general interest rate level.
Redemptions may be subject to temporary restrictions and delays due to the company’s regulations.
Redemption of shares involves the distribution of assets by purchasing the company’s own shares in accordance with Chapter 13, Section 1 of the Companies Act. When considering the distribution of assets, the company’s board must take into account the company’s overall financial position. According to Chapter 13, Section 2 of the Companies Act, assets may not be distributed if it is known that the distribution would cause insolvency. Secondly, when implementing redemptions, the equality of shareholders must still be observed; according to the Companies Act, neither the general meeting, the board, the managing director, nor the supervisory board may make a decision or take any other action that is likely to produce undue benefit to a shareholder or other at the expense of the company or another shareholder.
In exceptional situations, such as the COVID-19 virus outbreak in the spring of 2020, the number of redemption requests may be so difficult to predict and significant that all redemptions requested cannot be made with the existing cash reserve, and thus, in accordance with the Companies Act, the redemptions according to the requests may need to be temporarily suspended.
Management
The company is prepared for various risks in its operations, with the adequacy of the cash reserve being one of the most important. Optimization of the cash reserve has a significant impact on business profitability. On the one hand, there must be sufficient reserve for both lending and redemptions, but at the same time, capital must primarily be lent out in order to have any business at all. A key action is to direct available cash flow to the most profitable products. Since fixed costs do not scale with revenue growth, investing in profitable markets will improve the company’s relative and absolute performance, enabling the initiation of redemption programs. We closely monitor the development of circumstances and will also periodically reassess decisions related to redemptions.
Business always involves risks, and we must be prepared to face uncertainties. We cannot guarantee that our operations will always be profitable or that our cash flow will always be positive.
Potential credit losses can affect our financial situation, and fluctuations in market interest rates can affect our business and results.
Management
We invest in long-term planning and focus on developing products and services that meet our customers’ needs and are also financially viable.
The financial situation is closely monitored daily, and information on the balance sheet and income statement is regularly shared with our stakeholders so that they can have a comprehensive understanding of our financial situation.
The reporting of financial information is overseen by an external auditor, Advico Ltd., which belongs to the international audit firm Grant Thornton. This ensures transparency and reliability of financial information.
Blue Finance Brands operating in multiple markets
Blue Finance Group is growing as a financial service provider in Europe already operating in Denmark, Spain, Poland and Finland.
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