Morningstar launches U.S. corporate credit ratings

NEW YORK Dec 2 (Reuters) - Investment research firm Morningstar Inc (MORN.O) has begun publishing credit ratings for U.S. companies, part of a push to bolster its fixed-income offerings, the company said on Wednesday.

The move comes at a time when traditional rating agencies have been under fire for failing to flag risks at securities that contributed to the global financial crisis.

"We think there's a big demand for an independent voice in this area," said Haywood Kelly, Morningstar's vice president of equity research. The Morningstar ratings "definitely serve that need."

Ratings have been published for about 100 of the largest U.S. companies, and about 1,000 companies will be covered within six months, Kelly said.

"We'll cover pretty much any issuer in the United States that's meaningful for bond investors," he said, adding that the ratings are a natural extension of Morningstar's equity research.

Ratings are available for free on the company's website, Morningstar.com. Paid subscribers will also have access to analysts' credit valuation models and can speak with analysts themselves.

LOOKING FIVE YEARS AHEAD

"We aren't just looking backward historically at what has happened at the firm; we're looking forward," said Catherine Odelbo, president of equity research at Morningstar. For example, ratings take into account five-year forecasts of a company's cash flow as well as forecasts of a company's competitive position and how that could change over time.

Rating methods will be fully transparent, Odelbo said.

"There's no black box," she said. "A lot of the approach that we've taken is academically vetted, so we're making that all available on Morningstar.com for anyone who wishes to see."

The rating service will not initially compete with the big three rating agencies' hammerlock on rating new issues for corporate bond underwriting.

Over time, Morningstar may consider applying for official recognition and expand in that area "if we thought it was useful in our research and helping investors," Odelbo said.

Lack of competition has long been a flash point for rating industry critics, as official status as a Nationally Recognized Statistical Rating Organization, or NRSRO, is needed to issue ratings that meet regulatory requirements.

While more companies are achieving NRSRO status, the industry continues to be dominated by Moody's Corp's (MCO.N) Moody's Investors Service, McGraw-Hill Cos' (MHP.N) Standard & Poor's and Fimalac SA's (LBCP.PA) Fitch Ratings.

INDEPENDENCE A PLUS

Proposed new regulatory requirements for rating agencies would actually do more to entrench the big three, Odelbo said. While established agencies have ample profit margins to absorb the expense of major new regulations, that is not the case with new entrants, she said.

Though Morningstar will not compete in the traditional NRSRO "issuer-pay" business model, "we think we can build a good business on the subscription-pay, investor-pay model," Kelly said.

Peter Andersen, portfolio manager for Congress Asset Management in Boston, said Morningstar will avoid the criticism that has been lobbed at established rating agencies for conflicts of interest because their revenues come from companies they rate. "That would be not an issue here," he said.

Morningstar's ratings are based on four key factors: business risk; forecasts of a company's cash flow relative to its liabilities; a solvency score, which measures leverage, liquidity, interest coverage and profitability; and distance to default, or the probability of a firm falling into financial distress based on market value and volatility of its assets.

Andersen said Morningstar's methodology for credit ratings seems "fairly robust" with more disclosure of methods than its stock ratings.

"I would think a fully independent organization where you do not even consult with the companies and merely do a quantitative rating based on your own modeling is probably a very appealing position to be in now," he said. (Editing by Leslie Adler) ((dena.aubin@thomsonreuters.com; +1-646-223-6325; Reuters Messaging: dena.aubin.reuters.com@reuters.net))