Once thought of as a sleepy backwater, the ratings business is now widely viewed as a key driver in some of the most dynamic market sectors, structured finance and structured credit, among others.
In the wake of Moody’s announcement on its Joint Default Analysis, but ahead of the release of its revised methodology, IFR invited some of the industry’s key players to discuss the changing role and key challenges of the ratings business.
Sam Theodore, managing director of financial institutions at DBRS, responsible for spearheading the firm’s European franchise, spoke frankly about the competitive landscape, the barriers to entry and the challenges it faces as the fourth rating agency.
Though issuers and their investors are often happy with as little as two agency ratings, the dynamic state of the ever-developing credit markets means there can be no room for complacency. Controversial opinions can only be rebutted, offset and mitigated if the market does not feel it is a prisoner to a couple of players. And, competition is surely a good thing given the burden of cost that issuers so often complain about.
Though investors would baulk at it, Ross Aucutt, head of capital issuance and securitisation within Barclays treasury questions whether the fee payment mechanism, as it currently stands, genuinely serves the buy-siders’ interests. After all, historically it was the investor who had always paid, a point that Fitch’s regional credit officer for EMEAA, Richard Hunter, makes.
Like DBRS, Hunter believes in the importance of opening the market to more divergent opinion, possibly with unsolicited ratings that might otherwise be suppressed. A theme which Prudential M&G’s Dagmar Kent Kershaw,who is responsible for the firm’s CDO activities, agrees on. Shadow ratings have become a significant source of revenue for agencies, which cater to investors’ desire to find out why a particular rating had been suppressed.
But for the major incumbents, it’s all about coverage and track record. S&P’s Blaise Ganguin, chief credit officer for Europe, argues that it is both relevant and useful to have a long-term track record. Certainly something which Ernst Liehr from SG’s rating advisory group would adhere to. He says bankers are happy with the main incumbents and only see value from a third agency when there is a split rating.
Yet despite this, Moody’s managing director corporate and project finance, Michel Madelain, says the landscape is tough. The ever-increasing demands of the market-place means that many new players now provide the analytics that were once the agency’s preserve alone.
So competition is a good thing, provided it’s for new products and services and not simply duplicating homogenous Triple A ratings, according to associate director of capital markets at HBOS, Ged Hawley. He also reckons the raters need to be transparent and held to account, ever more important in the context of Basel II.
But perhaps transparency is an over-egged buzz-word. Raters can evidently be transparently wrong. Despite two years of consultations and despite the need to differentiate, reaction to Moodys’ Joint Default Analysis took the agency by surprise.
But there again perhaps the fracas was more symptomatic of the market’s evolution from fundamental old-school to the new world order of default probabilities and loss given defaults churned out by the modern day model monkeys, whose alchemy now gives a Triple A derivative trade a surprising and perhaps unsettling, 160bp spread pick-up.
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