The call on Capitol Hill for more ratings agencies is being met with a tepid response in the debt market. While the three big ratings agencies say they all welcome more competition, some portfolio managers say new agencies are not necessary and in some cases could be harmful. Many were less than enthusiastic about using ratings from new agencies and said a change could have detrimental effects on collateralized loan obligations and collateralized debt obligations.
"It is good only from the perspective that there are more options, but the fact of the matter is, if we have too many rating agencies, it can create problems because people might structure deals for agencies that might be more accommodating [with their ratings]," said one portfolio manager. He explained that it is hard to bring in a new entity because there is a history and comfort level between the agencies and the companies and investors. "There is no incentive for someone to use a new rating agency because people will require ratings [for past credits] from the other agencies anyways," he said. The one positive, he thought, could be lower fees because of greater competition.
There are currently more than 100 rating agencies worldwide, but only five are a Nationally Recognized Statistical Rating Organization, NRSRSO. Following the fiascos surrounding Enron and WorldCom, greater scrutiny of the rating agencies was called for. The U.S. Senate Committee on Banking, Housing and Urban Affairs has been holding hearings with a variety of market players, including the rating agencies, to discuss greater scrutiny.
Another investor said that to set up new rating agencies that investors and companies could feel comfortable with would require a great deal of investment in terms of hiring and training. It would also require a strong effort in marketing itself to potential customers. That would be made difficult by the fact that companies already have to give access to the two prominent rating agencies and may not want to give access to additional groups. "Politicians, they are [quick] to call boogeyman, but it requires a lot of investment expertise," he said. "Imagine trying to assess risk on these things, the quantity of analysis that goes into this stuff is a big time expense."
One banker said the effects on CLOs and CDOs could be great. "In the context of our market, where more than half of the assets under management are put into vehicles that absolutely live and breath by rating agencies and how they rate the credit, they are hugely important." He explained that the risk is out there whether the rating agencies give a credit a double B rating or a triple B rating. The market is going to have its own view on the risks of the deal. The ratings come into play largely when calculating covenants and average spread tests a company may need to meet. He said that CLOs and CDOs that are structured with 10-12 year lives could be affected if investments within those vehicles are suddenly rerated or rated by different agencies.
Standard & Poor's, Moody's Investors Service and Fitch Ratings have all spoken out in favor of more competition. At the same time, they have defended the current work being done. In her testimony in front of the committee, Vickie Tillman, executive v.p. at S&P, cited a recent survey of fixed-income investors by Institutional Investor Magazine that said 83% of those surveyed said their confidence in rating agencies was the same as or greater than it was before Enron's collapse.
