New Raters
Two new competitors, Kroll Bond Rating Agency and Meredith Whitney Advisory Group, are out to make their mark on the world of credit ratings. The timing couldn’t be better for new players. The rating agencies’ reputations took a beating during the credit crisis when they had to slash their ratings on huge numbers of mortgage-
backed securities. There are opportunities for new players that can do things better.
“Competition is necessary, and the market
has laid groundwork for more agencies to en-
ter,” says Jeff Glenzer, managing director at the
Association for Financial Professionals.
Lawrence White, a professor of econom-
ics at New York University’s Stern School of
Business, says that as an investor, he wants
as many opinions out there as possible. Ad-
ditional rating agencies will mean more ideas,
new technologies, new models and new
ways of assessing risk,
White says.
Sanjiv Khattri,
CFO and executive
vice president at
$1.6 billion Covan-
ta Energy, is
also bullish. “Does the industry really need
new players? Yes. Recently, there’s been
significant relief, from a regulation point of
view, to allow more competition where pre-
viously, regulation prevented it.”
The Big Three—Moody’s, Standard &
Poor’s and Fitch—issue almost 90% of rat-
ings for corporate bonds and asset-backed
securities and 99% of those for govern-
ment, municipal and sovereign debt.
Their market lock reflects both regulatory
endorsement and the opaque Nationally
Recognized Statistical Ratings Organization
(NRSRO) designation criteria.
The three
agencies were
grandfathered in
when the Securities and Exchange Commis-
sion created the NRSRO system in 1975, which
effectively set them up as the main credit rat-
ing arbiters. Over time, ratings became tightly
wrapped up within various securities, banking
and insurance regulations, forcing investors to
seek out only NRSRO-rated securities. While
additional agencies later joined the NRSRO-
designated ranks, mergers ate away at the
expanded ranks, leaving Moody’s, S&P and
Fitch with their giant share of the market.
Until recently, the black hole surrounding
NRSRO licensing helped the Big Three retain
their market hold. The SEC offered no regulato-
ry process or even a statement of NRSRO licens-
ing qualifications. Applicants could wait years
to receive the “no action” letter
