Local rating agencies angle for spot on global stage
* ESMA rule opens window for alternatives to Big Three
* New players face uphill battle in entrenched marketplace
* Investors suggest newcomers offer little added value
By Christopher Langner
SINGAPORE, Feb 14 (IFR) - New rating agencies in Asia are hoping to launch themselves on the global stage thanks to a little known rule change by a European regulator made several years ago.
The European Securities and Markets Authority created Regulation 1060 in the wake of the global financial crisis in 2009. Officials across the globe were frustrated that rating companies had not done more to warn investors of impending problems in certain debt instruments.
The ESMA regulation suggested issuers that require two ratings choose at least one agency with less than 10% of the European market. Standard & Poor's and Moody's each have nearly 35% of the market in Europe, while Fitch has nearly 18%, according to December ESMA data.
"This means that issuers have to consider alternative rating agencies," said Alan Reid, managing director for Dominion Bond Rating Service in Europe. "It creates some opportunity in a highly competitive market dominated by two agencies," he added.
DBRS, for one, holds only 0.97% of the market, while two new entrants, Arc and Dagong Europe (part of UCRG), have just 0.04% and 0.01% respectively.
Arc Ratings, based in Malaysia, was formed in late January when Malaysian Rating Corp (Marc), along with Care Ratings from India, Global Credit Ratings from South Africa and SR Rating Group from Brazil, bought Sociedade de Avaliação Estratégica e Risco from Portugal.
Similarly China's Dagong founded Universal Credit Ratings Group last year along with Egan-Jones Ratings from the United States and Rus-Rating from Russia.
The new companies will still face a tough battle, however. Not only are investors much more familiar with the major rating agencies, but ESMA's regulation offers only the suggestion, not the requirement, that a smaller agency be used.
"Personally, I am not familiar with these guys," said a portfolio manager in Hong Kong for a large Western asset manager when asked about UCRG and Arc.
"We are happy to do our own fundamental analysis," he added.
Another credit analyst in Singapore expressed a similar view: "We have internal ratings which we rely on."
The new companies have aggressive growth strategies, though.
"We know that fund managers require a minimum of two ratings - we want to become one of them," said Razlan Mohamed, chief executive officer of Marc. "We may have to do it on an unsolicited basis in the beginning."
The additional competition is welcomed, even though it so far has had almost no effect on the market. "Diversification of opinions is always good," said the Hong Kong portfolio manager.
Even the two dominant rating agencies expressed similar views.
"We welcome competition as it supports a diversity of views on credit risk, but ultimately, it will be investors who will determine which ratings are credible and useful," said a spokesman for S&P.
Similarly, Michael Ye, managing director and regional head of Asia-Pacific for Moody's said: "Diversity of opinions in the marketplace is very important, we support healthy competition in the market for credit ratings, representing different business models and structures, and a level regulatory operating environment in which everyone competes on the basis of ratings quality."
Fitch declined to comment.
A NEW PERSPECTIVE?
However, investors said that while more opinions are good, it would be best if they offered something new.
"If the new agencies are carbon copies of the existing ones, you question what is the value they add," said the Hong Kong portfolio manager.
Mohamed of Marc suggested local rating agencies had better knowledge of local companies, and therefore would be better equipped to offer a more comprehensive assessment of their creditworthiness. However, he admitted that Arc's methodology would not veer too far from those of Fitch, Moody's and S&P.
"Analysing credit is a no-brainer; you just crunch a lot of data," he said. "We are just providing an alternative," he said.
If that is the case, the Hong Kong investor suggested the new competitors may offer little more than cheaper alternatives for issuers. "My concern would be if this new movement opens the possibility of rating shopping," he said.