Many fixed-income professionals are not convinced that newly annointed nationally recognized statistic rating organization (NRSRO) Dominion Bond Rating Service, which has 41 analysts compared to 800 at Moody's Investors Service and 1000 at Standard & Poor's, will be a factor in the market. Tom Parker, a high-yield portfolio manager at Barclays Global Investors, argues that the ratings agencies have run into trouble in recent years because they judge the creditworthiness of a company according to its market cap. Enron and WorldCom proved that bigger is not better when an economic bubble bursts and you don't have any earnings, he says. "How does Dominion change this? The answer is it doesn't," Parker says. "The agencies still have the same problem. How do you adjust to an environment where size isn't the key variable? Adding five other independent ratings agencies doesn't change that either."
Greg Root, executive v.p. at Dominion, says the company has no illusions about trying to compete with Moody's, S&P and Fitch Ratings, but hopes to build on its strengths in the structured finance and natural resources sectors, such as energy and paper. "We don't need to rate all the biggest companies in U.S. For the time being we just want to work with the investors, work with issuers, and see where can add value."
Moreover, Root says Dominion's approach to providing ratings gives it an advantage over S&P and Moody's. "While other agencies base their ratings on long-term projections, we believe that we're able to better account for short-term challenges that face a company. Just because a company is going through a downturn does not mean that its long-term prospects will be as gloomy," he said. He adds that instead of focusing just on profits and losses, Dominion considers a company's liquidity as a gauge of long-term prospects. He also contends Dominion can compete on pricing, "We plan to have an aggressive pricing model that we believe will be less costly than our competitors."
Glenn Reynolds, ceo of Creditsights, who spoke before Congress last year about the role of the ratings agencies, says the approval of Dominion is a step in the right direction. "It's a principle. Dominion won't compete with Moody's or S&P but maybe it merges with Fitch or with three or four others that come along. If you put more companies and more capital into the sector maybe five or 10 years from today there will be a viable third or fourth entity. Unless someone makes it possible there will never be anything but a duopoly with a distant third."
Reynolds says creating competition for Moody's and S&P is not at the top of legislators' agendas, but is critical to the health of the financial markets. "You're not gonna see guys outside the White House picketing the lack of NRSROs. It's right up there with watching the grass grow, but its extremely important to trillions of dollars of pools of investment money," he said.
Despite the indifference that greeted Dominion, a number of other agencies are still hoping to receive the NRSRO designation from the Securities and Exchange Commission. And some are gnashing their teeth that Dominion got the nod before them. Sean Egan, managing director of Egan-Jones Ratings Co., argues that his company should have been the selected as an NRSRO, which he says stands for "No Room Standing Room Only." "We are frustrated by this whole process," he says.
At present, Dominion rates the debt and preferred stock of more than 400 companies. It also tracks securities issued by 120 special purpose entities. It uses the letters "A," "B" and "C" to categorize long-term debt.