Feri mulls expansion beyond funds and sovereign ratings

Germany’s Feri EuroRating Services is considering expanding its activities beyond funds and countries after being approved as an EU credit rating agency under recently introduced regulations.

The agency fulfilled the requirements of the Credit Ratings Agency Regulation, which bring ratings agencies under regulatory oversight in Europe for the first time, with its local financial regulator Bafin.

“The successful completion of this critically important registration procedure officially validates the high quality and transparency of our rating methods and practices,” said Tobias Schmidt, managing partner.

“It will help us also to make clear to investors for other products that all the process we do are well done, and we do have processes you need for other areas which may not fall under the regulation.”

Feri has provided country ratings for 20 years, as well as on closed ended funds, and hedge and private equity portfolios based on the underlying assets.

Schmidt names structured finance and Pfandbriefe as possible areas for expansion. Structured finance would play to Feri’s existing strength in rating commercial and retail real estate objects.

Any further expansion would, however, likely involve taking share from the ‘Big 3′ incumbents of Standard & Poor’s, Moody’s and Fitch. Schmidt concedes the effective oligopoly in place makes this difficult.

But Feri enjoys some competitive advantages – not least a lingering mistrust among some market participants because many structured finance products the largest agencies rated highly before the financial crisis subsequently imploded.

A paper by academics at Kansas State University shortly after the crunch noted half all downgrades in the history of residential asset-backed securities occurred between January and July 2007, and by that year’s end “almost every rated class of residential mortgage-backed security was downgraded”.

Earlier this year, a review by S&P of MENA-focused structured finance tranches resulted in 62% of RMBS, 68% of CMBS, 28% of ABS, and 14% of collateralized debt obligations (CDO) deals being negatively affected.

Schmidt said a greater diversity of ratings agencies would benenfit the market.

“Some people say simply it would be good to have another player here because of an issue of trust. In the case of European debt, we saw the problems much earlier than our colleagues and on Greece we have the worst rating you can have and below this there is only default.”

A month ago Feri downgraded the US from AAA to AA, well ahead of any downgrades by its larger competitors.

“Country ratings naturally do face political pressure, which is certainly more noticeable for the Big-3 rating agencies than for us”, Schmidt says. “The fundamentally-driven, more quantitative approach of Feri supports this flexibility, which should be beneficial for investors.”

“Ratings should be basically fundamental, and reflect the fundamental ability and willingness of a sovereign to meet its debt obligations. They should not take into account any market indicators like credit default swaps (CDS). Both ratings and CDS are then complementary inputs for decision making of investors.”

Schmidt says the financial crisis was a “big hit to the reputation of the Big 3 agencies which were doing credit ratings in structured finance – the most difficult area in the crisis – and although Feri is not involved in that area, the crisis was a hit to agencies not doing those ratings as well.”

The new regulation Feri has passed imposes stringent criteria to ensure quality and independence of rating decisions. Without fulfilling it, agencies are barred from some work in the EU.

Provisions concern avoiding conflicts of interest, prohibiting simultaneously providing rating and advisory services to the same client, and establishing a rotation principle for rating analysts.

Regulated agencies must also regularly provide the supervisory authority with information on methodologies, models, results, the range of services they offer and their ownership structure.

Schmidt expresses concern some European governments are pushing for ratings agencies to provide them with ratings assessments more than one day in advance of publication, and to have ‘consultation’ with the agency.” This would bring a clear conflict of interest,” he says “as information of investors could be straightened and delayed”.

David Walker

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