Due to the article published in Realtid on February 16, 2022 with the title "Several crashed high-risk products in the Credit Fund", we hereby wish to provide clarifying comments on the content of the article.
In addition to this comment, you can now register for a webinar where any questions that may have arisen in connection with the article will be answered. You register at https://kreditfonden.se/webinar-scandinavian-credit-fund-imed-anledning-av-artikel-i-realtid/
First of all, it is important to point out that all of the problem credits highlighted in the article are already reserved in the fund's NAV, where the fund in all but one case – Trinitas – has managed to get back parts or the entire loan via pledges and collateral. In other words, the events have not caused the fund's shareholders any major damage.
The article has a strong negative angle and mainly omits information that is important for understanding how the fund works with collateral and risk control. This is despite the fact that we explained to the journalist how this is done and that the management of problematic loans is part of the fund's ongoing management. It should be emphasized that the fund has delivered approximately 6 percent per year since inception after fees, with provisions taken for feared and confirmed credit losses according to the international accounting standard IFRS 9. This is in line with set return targets and shows that the strategy is working.
The journalist begins the article by saying that the fund is actively sold as a "high yield low risk product".
To begin with, it must be clarified that the risk in the fund that we describe as low is the market risk, which is based on the fund's historical fluctuations or its standard deviation. It is also the standard deviation that forms the basis of the international standard risk rating set out in the KIID document (the fund has a second on a seven-point scale, with one being the lowest). In terms of market risk, the risk is considered low.
However, there are a number of other risks that we clearly highlight in the fund's information brochure, on the fund's website and in marketing materials. We are careful to point out that investors in the fund must above all take into account central risk factors such as credit risk and liquidity risk before an investment is made.
You can see how the fund's risks are communicated via the website at this link: https://kreditfonden.se/scandinavian-credit-fund-i/#risker
The fact that we sell the fund as a high-yield, low-risk product is therefore not in accordance with the truth.
The article further mentions a series of so-called high-risk projects that the fund has invested in, and the journalist asks why a fund with "low risk" invests in these.
In this context, it is important to underline that all of the fund's loans are senior secured, which means that there are always collaterals/pledges to claim in the event of a possible suspension of payment/default. It is the investment team's ability to structure the loans and, if necessary, run processes to get the money back in case of defaults that form the core of the fund's investment strategy.
The fund has exposure to a smaller proportion of high-risk credits (currently approximately 10 percent of the portfolio) where we judge that there is a very attractive return to be obtained in relation to the risk we take in the engagements, given the collateral that is placed on the loans. However, the majority of the portfolio consists of credits that we judge to be of significantly lower risk.
In the limited part that is high-risk bonds, it is natural that payment suspensions/defaults sometimes occur. Then our task is to ensure that the fund does not suffer losses. It can involve protracted processes in some cases and it happens that we have to enter into legal processes against companies as well as private individuals.
It is worth mentioning that the value of the collateral for loans that default can be far more valuable than the value of the underlying loan, for example if we manage to restructure a company where we had a lien on shares and thus release significant values. The fund looks at risk from a vertical perspective where the scale consists of credit rating and horizontally where volume is on the scale. By spreading the risk on rating and volume, the fund creates a high risk-adjusted return.
The article does not mention that the fund's loans are senior secured, but focuses solely on selected legal proceedings where the value of the fund's collateral can be questioned. The article also does not clearly explain how the fund continuously works with provisions that thus affect the fund's NAV when feared or established credit losses occur.
As previously mentioned, provisions are made on an ongoing basis in accordance with the international accounting standard IFRS 9, which means that the feared or ascertained credit losses mentioned in the article are already booked as provisions in the fund. In other words, it is not likely that these holdings will have any major negative effect on the fund in the future.
The article further explains that Scandinavian Credit Fund I has "secret positions", which makes it impossible for an investor to assess the risk in the fund.
We would like to emphasize that we do not keep positions secret in order to be non-transparent to investors. The reason why we cannot open the portfolio for public viewing is that, according to the agreements with many of the fund's borrowers, we are not allowed to communicate the loans and their terms further.
With regard to the specific loans mentioned in the article, we would like to emphasize that these constitute a small part of the total portfolio. Of the over 100 loans that we have made in the fund since the start, only one of these loans, Trinitas, has led to 100 % established credit losses for the investors. In this case, the losses were caused by fraud, which is difficult, if not impossible, to protect against. You can read about the damages process we are conducting against the organizer behind the Trinitas bond in order to claim liability, at the link below:
If you look overall at the share of problem loans in the fund since the fund's inception, write-downs and provisions amount to approximately 0.55 percent annually of the fund's total assets. This can be compared with the share of problem loans for Swedish banks, which according to SNL Financial amounted to 1.3 percent of the total loan stock in 2017, which is a low figure from an international perspective.
Finally, we would like to emphasize that in September of last year the fund entered into a guarantee agreement with the European investment fund EIF of SEK 3 billion, which is not apparent from the article. That agreement was preceded by a very solid due diligence procedure from the EIF where, among other things, the fund's processes, bond holdings and risk control were scrutinized in the smallest detail. We see this as a great stamp of quality and that the processes underlying the fund's investments are of the very highest quality.