Credora Credit Methodology V4
Given recent market events involving Celsius, Three Arrows Capital, Voyager, and others, transparent credit scoring will be vital for functioning and efficient capital markets in crypto.
Credit ratings help the market optimally price and allocate capital. In addition to calculating real-time privacy preserving risk metrics, Credora has built a Credit Evaluation Methodology to provide a systematic and ongoing assessment of the creditworthiness of firms looking to borrow capital.
The methodology scores all borrowers out of a total score of 1000. Ratings are expressed as letter grades from AA to D, indicating the relative level of credit risk. A Borrow Capacity metric is also calculated, using the credit score and leverage as primary inputs.
Credit Rating Scale
Credora conducts these evaluations based on information provided by the firms seeking the credit rating. The process requires the submission of KYC and financial statements on the Credora platform and follow-up responses from the borrower management team.
The Methodology currently distributes the total points between three main categories:
- Operations : Operations evaluates the firm from a due diligence perspective and includes factors such as compliance risk, management, and borrow history
- Performance : Performance analyzes the firm from a liquidity and solvency perspective while evaluating historical returns and drawdowns
- Risk Monitoring : Risk Monitoring awards points for the level of risk monitored assets on the Credora platform and the Portfolio Equity and Leverage of the firm
The Credit Evaluation Methodology is updated from time to time to align with new market developments and incorporate participant feedback.
On the back of recent volatility in markets and credit-related shocks, real-time visibility into risk is becoming an increasingly important factor in accurately assessing a borrower's creditworthiness. Given how fast the market has been moving, documents from 3 months ago are unlikely to be a true reflection of a borrower’s balance sheet.
As of this week, Credora is scoring all borrowers using the V4 version of the methodology. The recent changes are summarized as follows:
- Regardless of their risk monitoring status on the Credora platform, all borrowers are evaluated using a single model scored out of 1000 points. In the earlier version, firms that were not risk monitored were scored out of 900 points and considered on the same rating scale. This change addresses the large jumps in asset and equity values in extreme market volatility. Borrowers who have not provided any real-time visibility are limited to a maximum of 800 points and the corresponding A rating.
- A larger weighting is applied to solvency and liquidity metrics, specifically the Interest Coverage Ratio and Current Ratio. These provide better insight into the ability of the borrower to repay financial obligations even in market downturn conditions.
- More emphasis is placed on the quality of financials submitted by the borrower, rewarding detailed financial statement information, the responsiveness of the firms to due diligence questions, and the method of financial statement preparation.
Credora expects to continue refining the methodology based on user feedback, and as more static and real-time information is captured. Ultimately, standardized credit ratings provided by a transparent third party such as Credora provide a critical foundation for safe and efficient credit markets.