Benchmarking to Traditional Ratings

Credora
7 min readFeb 28, 2024

Ratings Agency Equivalents

Credora is transitioning its existing rating scale to a new ratings scale, anchored to the big 3 US Credit Ratings Agencies, in order to provide our borrowers, lenders and partners with greater clarity when interpreting and comparing the results of our Credit Assessments. All Credora Credit Reports will now contain a Ratings Agency Equivalent (“RAE”) and Implied Probability of Default (“Implied PD”). Additionally, these metrics will be visible on partner platforms as permissioned by borrowers.

Credora’s core methodologies are not changing. Borrowers still maintain the same score as before. That score now maps to a RAE (and Implied PD) versus a Credora defined rating scale. This means lenders can more easily compare Credora ratings and associated lending rates to traditional debt issuances. Any change in rating is the result of a mapping process, rather than a change in underlying credit methodologies.

Why use Ratings Agency Benchmarks?

The Credora team has undergone an extensive process to establish a Ratings Agency Equivalent between the prior scoring scale and traditional ratings agencies. Adjusting the rating scale increases the utility of Credit Assessment outputs, by permitting easier comparison to traditional markets. Additionally, the mapping permits the publishing of an Implied PD, enabling allocators to make informed decisions.

RAEs are scales used to compare a credit assessment performed by Credora to the credit ratings assigned by different credit rating agencies. RAEs provide a way to understand how a rating from one agency compares to the ratings from another. Defining equivalence allows Credora to map PDs for current Credora Scores and Ratings to a traditional ratings agency schema. Adopting or anchoring to the Credit Rating scale of the major US Ratings Agencies is a common practice in the industry.

Credora’s methodologies for PD estimation are aligned with the prevailing regulatory guidelines which reinforce the legitimacy and credibility of Credora’s ratings by standardizing the approach to credit risk estimation.

Mapping Ratings

The majority of outstanding Credora Ratings are for Digital Asset Trading Firms. The Trading Firm Methodology is composed of multiple sections, each containing a collection of factors which in aggregate total 1000 points. For each factor, a curve is used to translate an input (e.g. Current Ratio) into a score output. The methodology effectively distinguishes or discriminates between different levels of credit risk.

By mapping score outputs to the scale used by traditional ratings agencies and calculating an associated PD, Credora is capable of comparing Credit Assessment outputs for Trading Firms to the wider universe of credit opportunities. The Fintech methodology follows a similar structure, and was included in the analysis.

Credora establishes the RAE link between current Credit Ratings and traditional credit ratings agency outputs through financial ratio analysis. The process involved examining various financial metrics from Credora digital asset trading firms and benchmarking them to publicly available information on big 3 rated companies.

Alongside an industry’s growth outlook and qualitative factors, financial ratios play a key role in S&P, Moody’s, Fitch & Credora rating methodologies. Using the industry standard Altman Z method for assessing the creditworthiness of a company, we compared Altman Z-Scores with only the financial statement analysis components of Credora Scores. Developed by Edward Altman in the 1960s, the Z-Score is a formula for predicting bankruptcy that uses multiple corporate income and balance sheet values.

Focusing on financial ratios as a common ground between ratings methodologies offers a direct means of comparison. For each historical Credora score, we calculated an Altman Z-score and a score based on the financial components of our scoring methodology (“Partial Financial Score”), and subsequently performed a regression & binning analysis. We found a clear relationship between the two scores where, as the Credora Partial Financial Score increases, the Z-Score also increases, demonstrating a positive correlation between borrower creditworthiness and higher scores. This allows us to map Credora scores to traditional ratings, and, as a result, sufficiently apply PDs.

The results of the Altman Z-Score analysis demonstrated that the relevant Credora borrowers conservatively map to a range of S&P/Moody’s/Fitch ratings between a BBB+/Baa1/BBB+ and a CCC-/Caa3/CCC-.

Trading Firm Rating Scale Mapping

The below table displays the resulting distribution of Ratings Agency letter ratings vs Credora credit scores based on the Altman Z-Score mapping process.

Credora’s scoring scale is currently capped at BBB+ given the industries and markets currently targeted. For context, BBB+ is the current S&P or Fitch rating for Paypal, Facebook, Goldman Sachs, Citigroup, General Electric and Volkswagen. As the borrower audience evolves, so will the scoring scale.

Mapping other Models

Credora frequently uses other methodologies for rating Receivables Financing and Commodities Trading. These methodologies follow a Notch Adjustment approach, where a Final PD is derived by applying modifiers on top of an initial Anchor PD:

  • The Anchor PD for the Receivables Financing methodology is derived from the underlying performance of a portfolio of loans, and can be obtained from historical analysis of comparable loan portfolios, interest rate benchmarking, and third-party ratings agencies.
  • The Anchor PD for the Commodities Trading methodology relies on existing ratings agency frameworks for Commodities Trading firms. For this reason, the output of such models is a probability of default that can be directly mapped to a RAE.

Credora uses the same mapping relationship between RAE and PDs directly on the model PD output.

Conclusion

Enabling increasing comparison between Credora Credit Ratings and Traditional market ratings is a positive step for attracting capital into the digital asset ecosystem. This permits a more accurate quantification of the relative premium or discount for crypto native opportunities, as well as the increasing amount of private debt issuance which is relying on blockchain infrastructure.

FAQ

Why use Ratings Agency Benchmarks?

The Credora team has undergone an extensive process to establish a Ratings Agency Equivalent (RAEs) between its prior scoring scale and that of the big three ratings agencies.

In traditional markets, ratings agencies enable market segmentation which is evidently demonstrated in the pricing of debt across the wide spectrum of various asset classes.

By using RAEs, Credora aims to help active digital asset market participants better understand the relative risk, and make informed decisions.

Lastly, establishing RAEs and anchoring to the most established global ratings scale is common across various different types of Credit Ratings businesses.

How does the new rating scale differ from the old one?

Before, Credora mapped customers on a rating scale from AA to D. Now, Credora rated firms range between BBB+ and D, a subset of the traditional rating scales that represents the range of risk from Credora borrowers.

For Trading and Fintech firms, Credora will continue publishing a numerical score alongside the Credit Rating and Implied PD. This numerical score allows for further differentiation in comparing different borrowers.

I was previously a rating A, now I’m a B-, what does that mean?

Credora core methodologies are not changing. Borrowers still maintain the same score as before. That score now maps to a RAE (and Implied PD) versus a Credora defined ratings scale. Any change in rating, therefore, is the result of a mapping process, rather than a change in underlying credit methodologies.

Will previous ratings be recalibrated to fit the new scale?

Credora only externally publishes active ratings. Prior ratings will be migrated to the new scale, and may be published in future Credora content. For example, examining the distribution of historic Credora ratings, on an anonymized basis.

What are the implications of the new rating scale for the private credit space?

Generally, Credora believes this can help attract more capital to the digital asset credit industry. Credora believes in the democratization of access to Private Credit opportunities. Through technology-driven, systematic, and transparent ratings processes we aim to facilitate fast and thorough assessments of Private Credit opportunities, and enable their comparison with the most liquid debt markets in the world.

How will the transition to the new rating scale be managed?

Starting the week of February 19th, all Credora reports and published scores will have the new rating scale.

Is my new rating the same as a traditional rating from a big 3 ratings agency?

Credora’s credit ratings are a proprietary interpretation of credit risk using a scale comparable to the big 3 credit ratings agencies. They should not be understood by borrowers to be the same as a rating produced by S&P/Moody’s/Fitch, and should not be represented as such.

The letter grade is lower, will lenders think I am now a worse credit than before?

While optically this may be an adjustment from the current Credora ratings, it will allow a much wider set of lenders to interpret your credit score accurately, and should equip you with data that allows you to source more capital more efficiently. Some examples of traditional firms and their ratings are shown in the article.

Why does the Credora mapping only go to BBB+

The implied 1-year probability of default for a BBB+ rated debt issuance is 0.07–0.13%. Furthermore, in traditional markets, the current 1-year interest rate paid on BBB+ debt is ~6.5%. For context, BBB+ is the current S&P or Fitch rating for Paypal, Facebook, Goldman Sachs, Citigroup, General Electric and Volkswagen.

Credora’s scoring scale is currently capped at BBB+ given the industries and markets currently targeted. The digital asset industry is still relatively immature versus traditional finance. As a result, while not a blanket statement about all firms in the sector, multiple companies do not have a comparable operating history, similar financial controls, or as strong of financials as many of those in traditional markets.

Will my borrowing rate on Clearpool change?

The table which maps Credora Ratings outputs to Clearpool interest rate premiums will be adjusted to avoid any change in interest rate for borrowers who have had no change in their underlying score.

Can I compare ratings across two different models?

Yes, one of the advantages of using a standardized rating scale and an implied PD is the ability to more easily compare not only other Credora methodologies, but also other external methodologies benchmarked to a similar rating scale.

Over time, the expectation is for the upper end of the mapping to increasingly approach the full traditional ratings agency scale. As the borrower audience evolves, so will the scoring scale.

How can I get a Credora Rating?

To get onboarded with Credora, Request Access through our website.

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