Feri plans expansion to Pfandbriefe and structured finance

German ratings agency Feri is used to breaking fresh ground, its chief executive says – after all, it already downgraded the US.

Germany’s Feri EuroRating Services, the only major ratings agency already to have downgraded the US, is considering expanding its assessments beyond sovereigns and funds after winning approval as an EU credit rating agency under recently introduced regulations.

Tobias Schmidt, chief executive of Feri, says structured finance and Pfandbriefe are interesting areas Feri could tackle. In these areas, his firm would be competing with the ‘Big Three’ of Standard & Poor’s, Moody’s and Fitch. Feri already competes against the Big Three on country ratings, which it has been providing for the past 20 years, as well as for closed ended funds, hedge funds and private equity portfolios.

In the more closely followed area of sovereigns, Feri has already taken a lead over its rivals by downgrading the US from AAA to AA. It acted well before S&P put America on negative watch, and pre-empted Moody’s warning this month that Washington faces losing the treasured rating if both the rising debt is not arrested and political disagreement over the $14.3trn debt ceiling is not resolved.

Feri also cut Ireland early, in mid-2007. It acted on Greece early in 2009, months ahead of Fitch and Moody’s, which began late that year. While Feri began from a higher rating of A, it has cut further, to the lowest non-defaulting grade. On Italy’s rating, Feri moved after Fitch and Moody’s but was more severe in the downgrade.

UK brokers Charles Stanley said: “Fumbling this issue represents a significant risk factor for the financial markets going forward.”

Schmidt says the Big Three face more political pressure on their ratings than Feri does.

“Country ratings naturally do face political pressure, which is certainly more noticeable for the Big Three rating agencies than for us. The fundamentally driven, more quantitative approach of Feri supports 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 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”.

The global financial crisis dealt a damaging blow to the reputation of the Big Three rating agencies, after many of the structured finance products they rated highly before the 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”.

Feri’s reputation has mostly escaped a lingering mistrust of the sector, giving it a major competitive advantage. Schmidt says: “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 and on Greece we have [given] the worst rating you can have and below this there is only default.”

Feri is considering expanding to rate more areas. Structured finance would play to Feri’s existing strength in rating commercial and retail real estate objects, while Schmidt feels ratings on Pfrandbriefe currently misunderstand some important features of the asset class.

The agency has received fresh impetus to expand by fulfilling the requirements of the Credit Ratings Agency Regulation, which bring ratings agencies under regulatory oversight in Europe for the first time.

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