Competitors jostle to take on bigger rating agencies
Lesser-known rating agencies in markets such as Brazil, China and Germany are planning their challenges to S&P, Moody’s and Fitch as new regulations take hold.
There are dozens of relatively unknown credit rating agencies that pose no real challenge to the monopoly of the Big Three agencies – S&P, Fitch and Moody’s – in the credit and sovereign rating market. Up-and-coming firms include SR Ratings in Brazil, China’s Dagong Global Credit Rating and Feri EuroRating Services in Germany.
But thanks to a change in law, these agencies’ obscurity could be about to change. Last November, the European Commission approved draft legislation on the regulation of rating agencies.
Internal market commissioner Michel Barnier wanted to tackle the fact that “ratings have a direct impact on the markets and the wider economy and thus on the prosperity of European citizens”.
He added: “They are not just simple opinions… and rating agencies have made serious mistakes in the past.”
Barnier said his first objective was to reduce over-reliance on ratings and improve the quality of the rating process. He added credit rating agencies should face stricter rules, be more transparent about their ratings and be held accountable for their mistakes. Barnier said he also wanted to see “increased competition in this sector.”
One of the arguments for encouraging new players to enter the rating field is that lack of competition means agencies are under little pressure to impress issuers or investors.
Louis Pestel, analyst at French fund selector Insti7, says he has no preference for any particular agency, simply stating “they all provide information”.
More competition could encourage end investors to scrutinise which agency they choose, and thus push them to improve methods, transparency and business models.
As it stands, many investors are unhappy with the ratings provided by the big three. French fund selector Primonial Asset Management describes S&P downgrading France’s AAA rating in January as a “non-event” that had no impact on markets.
Janus Capital says it was “unnerving” to consider Spain and Italy are now considered by some agencies to be less creditworthy than Korea and Chile, and roughly equal to South Africa and Malaysia. It adds: “In our opinion, the credit ratings agencies are now following, not guiding, market perceptions of European sovereign credit risk.
“Credit ratings agencies play an important role in fixed-income markets, and we do keep an eye on ratings. However, we base our investment decisions on our own bottom-up research, not on what others are saying.”
Janus says ratings inefficiencies in the past have provided “great opportunities to add value to portfolios”.