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Real-World Assets are becoming a lasting part of onchain finance. At Plume we want everyone to understand this new ecosystem, built with traditional assets. The RWA Academy breaks down everything you need to know, from the most basic explanations to more detailed financial concepts. Here, we explain what credit ratings are, why they matter, and how they shape the way risk is priced in private credit.
Most people have heard of a credit score. It's an important number, one that has a big impact on whether you get approved for a mortgage, car loan, or apartment lease.
But credit scores are actually just the most familiar consumer-facing component of a much larger credit rating system that underpins every major financial market in the world.
Credit ratings on bonds, loans, and other debt instruments directly shape how trillions of dollars move across the global economy. A credit rating can make or break a capital acquisition strategy.
And before we talk about how tokenization can evolve credit scores, we need to understand what these ratings actually reflect.
What Are Credit Ratings?
A credit rating measures a borrower's likelihood of repaying their debt. The higher the chance of repayment, the higher the score. A simple concept at its core. However, the complexity comes from who makes the assessment, what goes into it, and what happens once the result is published.
In public bond markets, Moody's, S&P, and Fitch dominate the conversation. These well-known agencies publish ratings on government and corporate debt using a letter grade system. AAA sits at the top, and anything BBB- and above is considered investment grade.
Anything below is considered high yield, sometimes called "junk." Each step down the ladder reflects a higher potential probability that the borrower might miss a payment or default entirely.
These ratings aren’t just subjective opinions, as they drive real consequences for real financial entities. Insurance companies and pension funds often operate under mandates that prevent them from holding bonds below a certain rating threshold. When a bond gets downgraded across that line, the price moves before the news fully circulates because forced sellers have to exit. When it gets upgraded, the opposite happens as buyers rush into the newly-qualified asset.
A credit rating, in effect, is a piece of market infrastructure. It is how lenders, borrowers, and regulators speak a common language about risk.
Why Do Ratings Exist?
The most direct answer is information asymmetry.
A lender deciding whether to put capital into a 10-year corporate bond does not have time to read every quarterly filing and stress-test every covenant in every indenture. Most institutional buyers cannot do that across hundreds of positions in a portfolio. They need a shorthand. The rating is that shorthand.
Without it, every credit decision would require a full underwriting exercise from scratch. Capital would flow more slowly and at greater cost. Smaller borrowers would struggle to access debt markets at all. The rating system, for all its imperfections, is what allows the bond market to function at the scale it does.
That's the public market story. Private credit is a different conversation.
Ratings in Private Credit
Private credit doesn't have a Moody's or an S&P rating sitting on top of every deal.
Loans in this market are negotiated directly between a lender, often a fund, and a borrower. These loans often involve mid-sized companies that can't or won't access public bond markets. The terms are bespoke, with disclosures remaining private. The buyers are sophisticated allocators who, in theory, can do their own underwriting work in-house.
Where ratings exist in private credit, they tend to be internal. A fund builds its own credit model, assigns its own grades, and uses those grades to manage portfolio risk and report to its limited partners. Some larger transactions get rated by third parties, particularly NAIC designations used in the insurance world to satisfy regulatory capital requirements, but the systematic, public-facing rating culture of corporate bonds isn't really present here.
What goes into a private credit rating is generally similar to what goes into a public one. Borrower financials. Industry conditions. Collateral quality. Covenant structure. Cash flow stability. Management track record. The categories don't change much, but the rigor and format do.
Where the two really diverge is timing. Public bond ratings are reviewed periodically and updated when material information surfaces. Private credit ratings, especially internal ones, are often updated on a fixed cadence. Sometimes quarterly, sometimes annually. That time gap is where the most interesting problem in this entire conversation lives.
The Reactive Nature of Ratings
Every rating, public or private, shares the same fundamental property. At its core, it is a reaction to information.
A rating doesn't predict what will happen. It synthesizes what has happened, what is currently known, and what an analyst can reasonably infer about the near future. When new information arrives, whether that's a missed payment, a covenant breach, a strategic acquisition, or a quarterly earnings collapse, the rating gets updated to reflect it.
Which means a rating is always, structurally, a step behind reality. The lag between a real change in the borrower's situation and the rating that reflects it is the difference between an early warning and a confirmation of what the market already suspects.
In public markets, this lag is partially filled by price action. Bond prices move in real time. Credit default swap spreads widen or tighten. The borrower's stock telegraphs trouble before the formal downgrade lands. Dozens of signals run alongside the rating itself.
In private credit, those signals don't exist. There is no daily price feed for a privately negotiated loan. There is no public market reacting to news. The internal rating, updated quarterly, is often the primary instrument for tracking how a position is performing.
That gap is the chief pain point. A loan can deteriorate meaningfully between rating cycles, and the lender holding it may not see the full picture until the next review. By then, the cost of acting has often gone up.
The Frequency Problem
The mechanical answer to the gap is simple: update ratings more often. The practical answer is a lot harder.
Updating a rating requires fresh information. In public markets, that information arrives constantly through filings, news, and price discovery. In private credit, it has to be requested, gathered, and processed by hand. Borrowers report on their own schedule. Documentation moves through email and PDFs. Each cycle of review is genuinely expensive in terms of time and labor.
The result is that even the most sophisticated private credit funds run on quarterly cadences for most of their portfolios, with deeper reviews reserved for positions already flagged as troubled. That's not a particular failure of the funds. It's a constraint of the infrastructure they're working within.
Where Onchain Changes the Picture
Tokenization doesn't make a borrower more or less likely to repay. It doesn't change the underlying credit risk of any individual loan.
What it changes is the speed at which verifiable information flows around that loan.
When a private credit position lives onchain, new possibilities arise. Borrower attestations can be encoded directly into the asset's smart contract, meaning the data is structured and composable. Custodial confirmations, payment events, and covenant calculations can finally evolve from those easy-to-lose PDFs to high-fidelity, free-flowing data streams.
The downstream effect is that a rating, internal or external, no longer has to wait for the next quarterly cycle to incorporate material information. The information is already there, in a format that systems can read. Updating a credit assessment becomes a question of how often the model runs, rather than how often the data arrives.
That doesn’t mean humans are removed from the equation. Ratings still involve analysts, models, and methodologies. But the minimum acceptable lag time between when something happens and when the rating reflects can shrink dramatically when the underlying data is structured, verifiable, and continuous.
Better information at a higher frequency also opens up something more subtle. Pricing. If a rating can be updated more often, the implied price of risk on a loan can be updated more often too. Secondary markets in private credit have historically been thin partly because no one knows where to mark a position between formal review cycles. Faster, richer data closes that gap.
This is where onchain infrastructure starts to matter for due diligence in a way that goes beyond settlement speed or fractional access. The loan is the same. The borrower is the same. The underlying risk is the same. The visibility around all of it is what evolves.
Where Credit Ratings Fit in the RWA Landscape
Every asset class covered in this series carries risk. Bonds carry duration and credit risk. Public equities carry market and company risk. Commodities carry physical and supply risk. Private credit carries underwriting and concentration risk. Payment financing carries jurisdictional and counterparty risk.
Credit ratings are how that risk gets communicated and priced. They are the language layer sitting on top of the asset, and like any language, they only work as well as the accuracy of the words used.
For onchain portfolios, the question isn't whether ratings will exist. They will. The question is how much sharper they can become when the assets they describe are designed for continuous data flow from the start.
Better infrastructure doesn't replace credit analysis. It just gives the analysts something better to work with.
This material is for general informational and educational purposes only and does not constitute financial, investment, legal or tax advice. Tokenized assets involve risk and may not be suitable for all participants. Returns, performance and characteristics of traditional financial instruments may not translate identically to their tokenized counterparts. Always conduct your own research and consult qualified professionals before making decisions involving real-world assets or blockchain-based systems.