Governance
Risk management
B2Holding’s approach to risk management is to generate sustainable value for its shareholders through managing exposures to, among others, credit, market, operational and liquidity risks. Effective risk management and internal controls ensure shareholders’ value.
B2Holding ASA (“the Company”) is the parent company of the B2Holding consolidated group of companies described as “the Group” or “B2Holding”. The Risk management report is an integral part of the Directors’ Report.
The foundation of the Group’s risk management is its risk appetite and Internal control and risk management Policy, which provides the framework for the Group’s operations to assess and manage risks related to successful conduct of B2Holding’s business. Effective risk management and good internal control routines contribute to secure our shareholders’ investment in B2Holding ASA and the underlying assets.
In 2019, the Group’s risk management work was strengthened through a new central risk management function on Group level, headed by the Chief Risk Officer who has the operational responsibility for risk management in the Group. In addition, the Legal and Compliance functions became more closely linked under the Chief Legal and Compliance Officer.
The risk management function follows recognized risk management principles and manages the development of the Group-wide enterprise risk management framework including periodic risk mapping and reporting, thus ensuring a common understanding of risks, transparency, follow-up and coordination. As a result of the write downs in the second quarter 2019 related to secured assets in Central Europe and South East Europe, the Company saw the need to review if processes and routines were at a satisfactory level. During this process the Company discovered that there is room for improvement related to certain aspects of the business, and changes were initiated. Improvement projects include organizational changes hereunder new reporting lines which also include the strengthening of the risk management function. The projects initiated in 2019 will continue going forward, and the Group will have continued focus on developing this function further in 2020.
To further support the risk management principles, the Company, in consultation with the Audit Committee, will establish an Internal Audit function that shall report to the Audit Committee. The recruitment of an Internal Audit is in process.
When the Internal Audit position is in place and fully operative, the Company’s risk management system will follow the risk management principles in line with the three lines of defence model. In the model, the business is conducted and calculated risks are taken by the first line (business operations), while independent risk monitoring, management support and control is provided by the second line (risk and compliance). The third line of defence will be the Internal Audit function, which shall ensure proper functioning of the first and second lines. The three line of defence model is already incorporated and implemented in subsidiaries that are licensed and under supervision by local authorities.
The Group’s scope of business is to generate value for its shareholders through controlled exposure to credit risks based on its expertise in the process of acquiring and managing non-performing loans. Risks such as liquidity, operational and market risk should be minimized but balanced, as far as it is economically justifiable. Other types of risk such as management, regulatory and reputational risk are addressed through the Group’s governance and compliance policies.
The three lines of defence model
MANAGEMENT RISK
The foundation for how to run our business
Part of the Management Risk, such as losing key personnel, has been reduced through the implementation of guidelines for salaries and other remunerations for senior executives. Potential governance risks related to managing an international organisation in multiple countries has partly been reduced through Group level functions, policies and processes covering: direct oversight of business lines, investment management, legal, tax, risk, compliance, project management and financial control in order to ensure appropriate control mechanisms as well as to provide services to the local operations.
The Group is organised into two business lines, Unsecured and Secured Asset Management. These are supervised by the Head of Unsecured Asset Management and the Head of Secured Asset Management, who report directly to the Group CEO and are responsible for all business units. Business lines are operating and developing in accordance with B2Holding’s risk management framework and are subject to internal controls. The Group’s investment management, legal, tax, risk, compliance, project management and controlling teams support the business lines and local operations in conducting their business and with assessing and managing their risk.
The Group Executive Management (GEM) consists of the CEO, the heads of the business lines and the heads of Group functions (Finance, Legal & Compliance, Investments, Risk, M&A and Investor Relations, Corporate Development, Personnel, Improvement & Restructuring) is an advisory body to the CEO and a management forum for monitoring risk elements across functions.
REGULATORY RISK
B2Holding comply with external regulations, laws and policies and ensure their observance
The Group depends on authorisations and licenses from various authorities. B2Holding face regulatory risk with respect to changes in laws and regulations that may affect the markets where we operate and thereby our business prospects.
From a regulatory perspective, the different jurisdictions that B2Holding operates in approach the issue of NPLs in different ways. The business units are licensed to operate as one or more of the following: portfolio purchaser, portfolio owner, collection company, credit information provider or, as a lender. The license requirements remain under supervision of the relevant local operation.
In addition, B2Holding participates in managing its regulatory risk by actively participating in various industry associations that develop standards and best practices and promote the role of the industry in supporting the health and viability of the financial system.
REPUTATIONAL RISK
Reputational risk is of great importance in the Group’s relationship with banks, clients, customers, employees, investors, regulators and other stakeholders
Negative attention regarding the Group or the industry in general may have an adverse effect on the Group’s customers, employee loyalty, clients willingness to sell and the investors willingness to invest. Such reputational risks are continuously addressed. Internal controls, together with the Group’s common Code of Conduct and compliance and governance policies contribute to improving B2Holding’s reputation as a recognised industry player, a good employer, and a reliable business partner.
CREDIT RISK
The risk of loss from customers not repaying principal or interests accrued
A large part of the Group’s assets consists of portfolios of purchased consumer and corporate receivables, both unsecured and secured, which were already non-performing when acquired by the Group. In other words, previous creditors have already attempted and failed to collect amounts due following initial or numerous non-payments. All acquisitions are based on careful valuations to predict future net collections and are approved via the Investment process as illustrated on page 15. B2Holding constantly aims to reduce the risk through applying extensive experience and using the Company’s proprietary database consisting of detailed analytical data based on a constantly growing history of NPL portfolios. It is crucial for the Group’s business to achieve an overall rate of collection above that reflected in the prices paid. While B2Holding believes that the recoveries on the Group’s loan portfolios will be in excess of the amount paid, amounts recovered may be less than targeted.
Credit risk is monitored, analysed and controlled by Group’s local business operations and by the central business control units.
MARKET RISK
The risk arising from unexpected movements in exchange rates and interest rates
Foreign exchange risk that has an impact on B2Holding’s financial statements arises mainly as a result of:
- The currency used in the consolidated financial statements is different from the reporting currency of the subsidiaries (translation risk).
- Assets and liabilities of the Group are denominated in different currencies and certain revenue and costs arise in different currencies (transaction risk).
B2Holding’s accounts are denominated in NOK, while a large part of the Group’s business is carried out in EUR, SEK, DKK, PLN, HRK, RON, BGN, CZK and other currencies. The Group’s receivables portfolios (assets) are mainly denominated in foreign currencies. The Group’s net borrowing adjusted for currency derivatives is made in relevant currencies reflecting the underlying expected cash flow from the loans and receivables. Thus, the Group is exposed to both translation and transaction risk.
Furthermore, in each of the jurisdictions where the Group is present, all revenue and most of the expenses are in local currency. Accordingly, any significant movements in the relevant exchange rates may have a material effect on the Group’s business, results of operations, or financial conditions.
To mitigate the currency risk the Group uses a multicurrency bank facility and bond loans denominated in EUR, effectively establishing an operational hedge by financing acquired portfolios in the same currency as the repayments expected from portfolios. However, portfolios acquired in for example Croatia, the Czech Republic, Bulgaria and Romania are financed by EUR due to limited possibilities for medium and long-term hedging arrangements when borrowing in those currencies. Croatia and Bulgaria have pegged their currency to the EUR within a limited band.
B2Holding is exposed to changes in interest rates since the Group’s debt has an element of floating interest rate. The Group employs hedging strategies that enable B2Holding to, within certain limits, hedge its interest exposure and hence monitor and reduce overall interest rate risk exposure.
Operational currency exposure is constantly monitored and relevant hedging arrangements are assessed and applied in accordance with Group’s risk policies.
External event: Covid-19 pandemic
The Covid-19 disease, which was declared a global pandemic by the World Health Organization (WHO) in mid-March 2020, is expected to affect the market for purchasing and collecting non-performing loans. The pandemic continues to progress and evolve, and it is not possible to predict the full extent and duration of resulting operational and economic impact for B2Holding. The Group has followed all precautionary measures imposed by local health authorities in the countries where the Group has presence, in order to protect employees, their families and the local communities in general. The Group’s entities have moved most functions to home offices and are able to ensure business continuity.
OPERATIONAL RISK
Operational risk is a broad area, including but not limited to the risk of loss from failed internal processes, people, IT systems or external events
Operational risk has increased in scope over the years due to the growth in the number of portfolios owned as well as to the acquisition of collection platforms and the building of new platforms. Operational risks arise as a result of system implementations and integrations, various legal and tax frameworks and differences between B2Holding’s subsidiary companies and country cultures.
B2Holding manages these risks through the implementation of a Group-wide risk management framework. The risk management framework was previously tested in one of the Group’s subsidiaries, with a full roll-out started in 2019 and scheduled for completion during 2020. Additional mitigation of operational risks will be achieved by the on-going implementation of the Group-wide governance system.
Involvement and participation in local management bodies, integration of business lines under dedicated central functions, Group policies and guidelines for key business areas, implementation of operational reporting, and comprehensive risk identification and monitoring are further measures aimed to mitigate operational risks.
The exposure to operational risks will continue to be met by further development of the risk management framework, including the tracking of key risk indicators and internal training in the year to come.
LIQUIDITY RISK
The risk of not obtaining funding and the inability to meet payment obligations when they fall due
B2Holding’s liquidity requirements consist mainly for the funding of purchased portfolios, operating expenses, taxation and interest payments. The Group’s principal sources of liquidity are net cash generated from its operating activities, borrowings under the five bond loans and the revolving credit facility and share capital. Liquidity is monitored frequently and reported regularly to the Group management and monthly to the Board of Directors.
The capital threshold for equity in the loan agreements are set at a minimum consolidated book equity ratio of 25 %. The Group’s capacity to assume risk is determined by the Board of Directors. B2Holding’s risk function monitors risk levels against the risk appetite and ensures that the Group does not assume risk that exceeds the risk capacity and limits.
The refinancing risk is the risk that the Group, at the maturity of an existing financing facility, is unable to successfully refinance the indebtedness. B2Holding’s revolving credit facility and bonds contain certain covenants, which are customary in financings of this type, which impose restrictions on the Group’s operations and financial flexibility. The Group is mitigating the refinancing risk by monitoring the debt market and refinancing its debt structure when market conditions are favourable.
Liquidity risk is monitored by the Group’s treasury function, the risk function, the Group Management and the Board of Directors.
Our investment process
