Risk Groups of Investment Projects or how to evaluate real estate projects?
Nordstreet is assessing each Project Owner, guarantors or surers as well as enforcement measures (if any) individually. Creditworthiness assessment will be carried out by experts.
When carrying out creditworthiness assessment, Nordstreet is seeking to assess the probability of losses of the financier by means of the focused investment platform. The company has divided the risk of Project Owners’ creditworthiness to low (A), medium (B), higher (C) and high (D). Each indicator has a respective level of importance determined and the following six-factor equation has been derived:
Z = 3.3 × K1 + 1 × K2 + 0.6 × K3 + 1.4 × K4 + 1.2 × K5 + K6, where:
- K1 stands for profitability of assets (net profit / all assets);
- K2 stands for return on assets (sales revenue / all assets);
- K3stands for equity coverage ratio (equity / short-term liabilities);
- K4 stands for net profitability of assets (retained earnings / all assets);
- K5 stands for the proportion of equity in assets (equity / all assets).
- K6 stands for market information about the sector where the Project Owner is operating (in case of contraction of the sector over the last year by 10% and more, the coefficient amounts to (-0.1) or 0 in another case).
The value calculated according to this formula describes the probability of financier’s losses which is presented as an opinion of the Platform Operator.
The rating scale is provided below.
- Z value up to 1.8 = Class D, High creditworthiness risk
- Z value from 1.9 to 2.7 = Class C, Higher creditworthiness risk
- Z value from 2.8 to 2.9 = Class B, Medium creditworthiness risk
- Z value more than 3 = Class A, Low creditworthiness risk
The value calculated according to the respective formula describes groups of risk which determine the loan receiver’s creditworthiness rating, which determines the loan receiver’s possibilities of fulfilment of the obligation.
In case there are surers or guarantors, their creditworthiness is assessed in the same way as that of Project Owners. Provided that the risk of a Project Owner is medium, and the liabilities of the Project Owner are sured or guaranteed by a third party whose risk is low, the final creditworthiness risk of the Project Owner shall be assessed as low.
In addition, Nordstreet specifies the value of the pledged immovable property to financiers and it assesses the decreased probability of financier’s losses. If the value of the pledged property is higher than 95% of the amount claimed for financing, then the creditworthiness risk of the Project Owner is considered low; if it is above 90% but no more than 95%, then the creditworthiness risk of the Project Owner is considered medium; if it is above 70% but no more than 90%, then the creditworthiness risk of the Project Owner is considered higher; if it is no more than 70%, then the creditworthiness risk of the Project Owner is considered high. If the risk of the Project Owner is medium following the assessment of the Project Owner, yet the risk of the Project Owner is low according to the property pledged, then the final risk of the Project Owner is assessed as low.