From the April 2011 issue of Treasury & Risk magazine

New Raters Enter the Fray

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 enter," says Jeff Glenzer, managing director at the Association for Financial Professionals.

Kroll, the brainchild of Jules Kroll, founder of the eponymous corporate security firm, appears to be listening. Kroll says it will do its own due diligence on the organizations it rates, pay greater attention to ratings transparency and develop a post-rating follow-up plan. The company is also starting slowly. It will initially offer only structured finance ratings then segue into municipal ratings. By 2012, it plans to rate corporate bonds.

Meredith Whitney made her name as an analyst with her presciently gloomy prognosis on bank stocks a few years ago. Her firm, Whitney Advisory, until now has specialized in investment analysis of financial firms. The specifics of its rating methodology are still under wraps, and the company refuses to comment. A presentation Meredith Whitney made to SEC officials in support of gaining NRSRO status indicates the firm plans to build its research staff from 27 currently to 100 in its first year as a rating agency.

AFP's Glenzer would like to see the issuer-pay model disappear. "If you believe rating agencies provide value, why aren't all parties paying for it, thus managing the conflict of interest and eliminating the wallet control issue altogether?" he asks.

Weinberger suggests that both investors and issuers pay for ratings through a small fee attached to new fixed-income issues and bond trades in the secondary market. This would eliminate conflicts of interest while allowing ratings to be distributed throughout the market and in a more transparent way, he says.

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