During Debitum's due diligence process, every broker on the platform is asked to provide additional security for our investors or agree on covenants, which, if breached, will terminate the partnership agreement. Currently, there are six types of securities and covenants which are used on our platform:
- Buyback obligation - every broker on the platform has been evaluated by Debitum risk team to estimate whether the broker is capable of covering its financial obligations in case of a sudden rise of the portfolio default rate and delinquency of loans (stress testing). Based on the results of the due diligence, every broker has a maximum limit of investments that can be provided on the platform. This limit is parallel with the broker's ability to execute the buyback obligation. Lastly, if the limit is sufficient for Debitum to work with, the buyback obligation is added to the partnership agreement with the broker and, if breached, would cause termination of the agreement.
- Advanced buyback obligation - in addition to the regular buyback obligation, some brokers agree on stricter buyback obligation terms to provide more security to our investors: earlier buyback of investments, minimum LTV ratio for investments, third-party guarantee in case of a buyback, and similar. The additional terms are usually agreed with brokers which do not have an extensive track record of loan origination.
- Ratios - based on the financial and operational performance of every broker on the platform, Debitum risk team establishes appropriate financial or operational performance limits that cannot be breached by the broker. Most common ratio covenants are: 1) debt-to-equity ratio; 2) defaulted loans ratio; and 3) equity-to-portfolio ratio.
- Reserve fund is established to meet unexpected future defaults or financial obligations that may occur. Additionally, it may be used to cover scheduled and routine expenses (e.g. settlements with brokers). Periodic deposits are usually made into the fund and the volume of the fund is parallel with the volume of broker's investments on the platform.
- Pledge - portion of a broker's portfolio which is used as collateral for investments on the platform. This portion of the portfolio is not provided to Debitum investors and it is kept within the books of the broker. Additionally, this portion of the portfolio cannot be pledged or sold to any other party than Debitum. Interest revenues and principal from this part of the broker's portfolio would be used to cover any potential losses to Debitum investors.
- Surety - a person or company which accepts legal responsibility for a broker's debt or behavior. Usually, sureties are provided by the managers of brokers or holding companies that own the broker.