Coming soon: introducing more transparency for investors with the Mintos Risk Score

08.10.2020

mintosblog

  • The Mintos Risk Score is a new risk grading model that evaluates investment opportunities on Mintos
  • It will enhance the transparency and depth of insights for investors
  • Besides the overall score, investors will see 4 additional subscores (loan portfolio performance, loan servicer efficiency, buyback strength and cooperation structure)
  • Scores and subscores will be based on a completely numerical point-based model
  • The Mintos Risk Score and updates of the existing ratings will be introduced in the second half of October 2020

In 2018, we introduced Mintos Ratings, the first Mintos-developed risk assessment methodology that we use to portray the financial and operational stability of lending companies on our marketplace.

Since the launch, we gained a lot of practical experience with this methodology and valuable feedback from our investors. As a result, this year we worked to enhance the way we evaluate and show the risk-related business aspects of investments on our marketplace.  

The Mintos Risk Score is a numerical measure that portrays the risk level of a particular investment opportunity. It’s an aggregate of four subscores that are summarized and expressed through a numerical point-based risk evaluation model.

Continue reading for more details about subscores

A new and enhanced level of transparency

In general, the Mintos Risk Score provides more transparency for investors when it comes to information needed for evaluation of investment opportunities and investment decision-making. 

These are some of the most important Mintos Risk Score benefits for investors:

  • More detailed overview

The Mintos Risk Score will be shown on a lending company level. The overall score is based on four subscores that will be assigned to four different aspects of the evaluated investment opportunity: Loan portfolio performance, Loan servicer efficiency, Buyback strength, Cooperation structure. We believe these 4 subscores are the most important factors for investors when it comes to evaluating investment opportunities. Subscores will be visible for investors across different places on the platform.

  • Additional insight into loan portfolio performance

Throughout our cooperation with a lending company, we pay special attention to loan portfolio quality and performance. The quality of the loan portfolio is directly dependent on the borrower repayments and thus is a very important indicator for the payout dynamics for Mintos investors. With the Mintos Risk Score, we are giving an insight into loan portfolio performance by assigning it a subscore. Investors can now compare standings of a particular loan portfolio with other loan portfolios available on the Mintos marketplace to make more informed investment decisions. 

  • More transparency about the lending company

Usually, the lending company will issue and service the loan, while also providing buyback to the investors. As a result, we have separated these actions into two different subscores (Loan servicer efficiency and Buyback strength) to provide investors with a better and more detailed review.  In some cases, loan servicing and buyback might be provided by companies other than the loan originating company. By introducing subscores, investors will be able to evaluate different investment setup aspects, even if the services are provided by multiple entities. 

  • New: an overview of the legal setup of the cooperation with the lending company

An addition to our risk assessment is the evaluation of the legal setup that defines the cooperation between the lending company and Mintos as a representative of investors. This business aspect proves to be very important in a time of market distress, as it helps evaluate potentials of recoverability. Now we’re taking a close look at it, we’re assigning it a standalone subscore, and sharing this information transparently with investors. 

  • Completely numerical model

Mintos risk subscores and scores will be calculated based on our point-based risk evaluation model, and all input for these calculations will be numerical.

The methodology of the Mintos Risk Score

The methodology of the Mintos Risk Score is complex by the amount of information processed but simple in the value delivery for investors. It is primarily designed to equip investors with additional insight into a particular investment opportunity. 

Illustration: preview of scores and subscores on the Loan originator page on Mintos

Publicly available information and information collected through the due diligence and monitoring process is used in a point-based risk evaluation model. It results in 4 evaluation subscores: Loan portfolio performance, Loan servicer efficiency, Buyback strength, and Cooperation structure. These four subscores give the Mintos Risk Score – the general score calculated by weighing in points from the subscores: 40% loan portfolio performance, 25% loan servicer efficiency, 25% buyback strength, 10% cooperation structure

Let’s learn more about them. 

1. Loan portfolio performance

To understand portfolio quality, we compare non-performing loans ratio, annual percentage rate and maturity term to the direct portfolio-related operational costs. Besides other portfolio health indicators, we take a deep look into the historical performance of the lending company’s loan book. The loan portfolio performance subscore is calculated based on information about:

  • Loan portfolio quality
  • Historical and current loan repayment trends
  • Historical and current loss rates
  • Issuance volumes
  • Track record seniority
  • Product characteristics (e.g. liquidity of the collateral)

2. Loan servicer efficiency

Through this subscore we measure the loan servicer’s efficiency when it comes to collection of borrowers’ payments. Capabilities of the loan servicer are expressed in a subscore that’s an evaluation summary of: 

  • Business procedures, compliance, and quality control 
  • Company’s management and internal risk controls
  • Loan administration structure and processes
  • Management of non-performing loans  

In some cases, the loan servicer can be a different business entity from the loan originator.

3. Buyback strength

This subscore measures the buyback strength and is a summary of the obligor’s ability to fulfil contractual obligations, meet liquidity needs and capital sufficiency. We calculate this subscore based on:

  • Financial profile, performance, and projections
  • Management experience
  • The business regulatory and legal environment
  • Diversification of revenue streams and geographies 

In rare cases, the buyback can be the responsibility of a business entity that’s different both from the loan originator and from the loan servicing company. Even if such cases appear, with the current risk evaluation model, it will be possible to have an insight into the standings of all involved business entities. 

4. Cooperation structure

Cooperation structure subscore evaluates the legal setup between the lending company and Mintos. Factors that are evaluated, summarized and expressed with this subscore are:

  • Access to borrower-related cash flows
  • Recoverability potential based on the legal setup
  • Transparency of cooperation structure for investors

 

Mintos Risk Score as a numerical scale 

The numerical scale for the Mintos Risk Score ranges from 10 (low risk) to 1 (high risk). The same range and values are assigned to the Mintos risk subscores. 

All scores and subscores have the same range, but with difference in interpretation

Scores from 1 to 4 are considered high-risk, scores from 5 to 7 mid-risk, and Scores from 8 to 10 are considered low-risk. 

More details about what each of these risk intervals signifies for a specific investment opportunity will be shared later on the upcoming web page for the Mintos Risk Score.

When a lending company is suspended or defaulted on the Mintos marketplace, it will be marked with a Suspended or Defaulted status. In such cases, instead of score, the value shown will be Score withdrawn. Score will be withdrawn also when there’s a lack of information about the specific business aspect of the company that’s needed for subscore calculation, and when there’s prolonged inactivity of the lending company on the marketplace (e.g. no active loans for a long time). Investors can find more information about these statuses in the upcoming Mintos Risk Score FAQ. 

Where you will see the Mintos Risk Score 

The first version of the Mintos Risk Score will be launched on Mintos in the second half of October 2020. It will be added to the lending companies’ pages on the marketplace and investors will be able to see the overall score and subscore values for all four evaluated aspects of the investment opportunity directly on this page. The same information will be available in individual lending companies’ pages, under Country details. 

An updated version will follow later in November and will add the 4 subscores in other places. Scores will be a new addition to the filter options when selecting, investing or viewing loans on the Mintos marketplace. The Mintos Risk Score will replace the previous Mintos Rating throughout the platform. 

Please note that the Mintos Risk Score is used as an internal risk measurement and it’s relevant for the risk assessment of the investment opportunities on the Mintos marketplace. It should not be compared to some other risk rating systems (e.g. Fitch Ratings).

We will remind you about the Mintos Risk Score and your investment strategies’ adjustments closer to the launch date.

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