Credit rating - less dependency, more diligence
Jinfo Blog

By Tim Buckley Owen

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Breaking with its previous practice, Outsell’s latest credit and financial information report focuses not on market size and share but on the current structure of the sector and the critical factors impacting it.  It’s just one of a number of indicators of the upheaval that can be expected in the sector before too long.

Financial market disruptions of the past few years are spawning a world of evolving financial regulations, scepticism of credit rating agencies and greater demand for diligence for credit purposes, says the charged-for report’s author Elizabeth Mason.  The “new normal” offers both opportunities and challenges to an array of established companies and new entrants, she concludes.

Both Bloomberg and Kroll have taken advantage of the lack of faith in the established credit rating agencies to launch services of their own to challenge the Big Three – Fitch, Moody’s and Standard & Poors.  Although the two new services differ significantly from each other, they evidently depend much more on superior number crunching technology than on warm-bodied “expert” opinion.

Fortune magazine expressed some disappointment in Bloomberg’s tool when it was launched last May; it didn’t rate bonds when they were issued, so it didn’t address the “issuer pays” conflict of interest – and it only rated corporate debt, not the structured bonds that were at the heart of the credit crisis.  Bloomberg didn’t apply to the Securities & Exchange Commission to become a Nationally Recognized Statistical Rating Organization (NRSRO) either – but it does use a completely transparent quantitative model (see LiveWire for more background on this), and it’s anyway only one of over 30,000 tools that Bloomberg offers.

But now it faces competition from veteran risk consultancy company Kroll, which has recently launched its own credit rating agency.  Kroll Bond Ratings is an NRSRO – and it claims that it will sidestep the failings of the established agencies by not relying solely on the information provided by the bond issuers, keeping investor interests above all other concerns, and putting both its ratings methodology and analysis in the public domain.

Meanwhile the G20 club of the world’s richest economies is trying to reduce official dependency on the agencies altogether.  Last October its Financial Stability Board published Principles for Reducing Reliance on Credit Rating Agency (CRA) Ratings, saying that their use had undesirably reduced banks’, institutional investors’ and other market participants’ own capacity for credit risk assessment and due diligence; it’s due to report on progress to G20 finance ministers in April and October of this year. 

Pulling back from automatic reliance on the established rating providers undoubtedly offers opportunities for new entrants.  But it also raises challenges for corporate information managers: how to discover new sources, who to assess and what to recommend.

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