What is loan grading?
Since the introduction of loan grading all loans listed on ThinCats were issued with a Credit and a Security Grade, represented by a series of “stars” and “padlocks” respectively. These were assigned based on in-depth analyses performed on the company requesting the loan, its directors, and the security pledged against the loan. Additionally, in relevant cases, cash flows were used to determine the security cover of a loan where these cash flows were seen to be predictable and diversified.
ThinCats prides itself on its hands-on approach to loans and their security, and each loan is assessed on an individual basis.
Credit Grades range from five stars (lowest risk of default) through to one star (highest risk of default).
Security Grades range from five padlocks (highest security in relation to recovery of investment upon default) through to one padlock (lowest security in relation to recovery of investment upon default).
The gradings supported your investment choices, they did not replace it. The decision as to whether or not to invest in an individual business loan will always rest with the investor.
Investors were encouraged to perform their own due diligence on each lending opportunity before any investment was made.
Why does ThinCats issue credit and security grades?
Alongside the existing loan documentation, which gives an overview of each loan, credit and security grading provides a methodical assessment of risks associated with each lending opportunity, and can be consistently applied.
How does loan grading work?
The two-tiered grading system assesses each loan based on:
Credit quality: The ability of a company to service and repay its loan, represented by stars.
Security quality: The value of the borrower’s assets available in a default scenario relative to the size of loan, represented by padlocks.
|Lower - Medium Risk|
|Upper - Medium Risk|
Credit Grading for corporate loans
Credit grades assigned to corporate borrowers represent ThinCats’ assessment of the risks associated with the company requesting the loan. The grading is based on factors including (but not limited to):
(i) a ThinCats-proprietary enhanced blend of credit reference agency scores
(ii) recent growth performance (again unique to ThinCats’ model)
(iii) other characteristics of the company and its directors
It is indicative of a company’s ability to service the debt, as well as to grow successfully.
Each component used to construct the credit grade has been subjected to extensive testing against proprietary analysis and the wider UK SME universe – some 3,000,000 firms, of which 500,000 are borrowers.
Credit Grading for property and project financing
Credit scores for property and project finance focus on the borrower’s ability to repay the loan through the property or project.
For investment property, the focus is on the rental demand and resulting cash flows, both now and in the future. Where the property is already occupied, ThinCats considered the type and concentration of the tenants as well as the terms of the lease agreements. For vacant properties, the focus will be on the local market and how the rental demand will be serviced or how the value will improve.
Property bridging was credit scored based on the likeliness of the property being refinanced or sold at the end of the term. Where there is a key event to take place in the bridging phase, for example planning consent to be granted in order to reduce the overall risk of the project, importance will be placed on the likeliness of this event occurring.
We quantified the key risks inherent in property development and project finance which include construction, operational and sale/refinancing risks.
In all instances, these loans were assessed on a case-by-case basis.
The padlocks represent the level of security that has been pledged against each loan. Assets pledged as security are valued assuming their estimated value in a formal insolvency scenario, which is conservative by nature to recognise the likely reduced valuation during a distressed sale. Pledged assets come in many different forms, and are individually valued for each loan.
Loans with five padlocks represent the highest grade of assets available relative to the loan on the platform, (more than 100%). Loans with a security grade of one padlock represent a low assets to loan ratio (below 25%). The exception to this being the unique offering of unsecured community loans by Community Chest, which will be listed with zero padlocks. This does not mean that these companies do not have any assets, it is a reflection of the fact that no security will be taken over the company’s assets.
- PLEASE BE AWARE THAT THINCATS CANNOT GUARANTEE THE PERFORMANCE OR THE EXTENT OF RECOVERY ON ANY LOAN, IRRESPECTIVE OF THE CREDIT OR SECURITY GRADE.
- Credit and Security Grades are issued at the time of the original loan listing. Company profiles and security valuation are subjected to change during the term of the loan. Credit and Security grades are NOT periodically updated to reflect new information.
- Neither the credit grading, nor the security grading, should be viewed as advice or recommendation.