Klaros Advises Compound in Obtaining First Credit Ratings for an Institutional DeFi Offering
Last week, Klaros client Compound Labs announced that S&P Global Ratings had assigned B- credit ratings to Compound Prime, LLC, the entity through which Compound Labs offers its Compound Treasury unsecured senior debt, and to the debt securities themselves.
This is a big deal. It makes Compound Prime the first company focused on building atop the infrastructure of decentralized finance (“DeFi”) to get a credit rating, either for itself or for its debt obligations. As Compound put it, this milestone “signals tremendous progress in the crypto industry’s maturity, as traditional institutions begin to judge the risks of digital asset-powered financial offerings,” adding a new and important piece to the bridge between DeFi and traditional finance.
The B- ratings represent a “stable” outlook for the company, reflecting S&P’s “expectation of limited loan losses on the [Compound Protocol],” but the ratings are not investment grade. As we expected, S&P notched the ratings down due to “[a] very low capital base, regulatory risk associated with cryptocurrencies, considerable operational risk and complexity, convertibility risk between private stable coins and fiat currency, and the potential hurdles to generate a 4% return.” Compound believes S&P could in the future upgrade its ratings “in an upside scenario, such as greater regulatory clarity for the digital asset industry or a longer track record of stable performance.”
We are pleased to have advised Compound throughout this first impression credit rating process and to have helped Compound achieve this important milestone.
For those interested, the full S&P report is available here.