NEW YORK, July 19 (IFR) - Just one year after rating its
first commercial mortgage-backed securities deal, newcomer Kroll
Bond Ratings has grabbed the No. 3 market-share spot in
year-to-date CMBS ratings, eclipsing some of its more
experienced competitors, including Big 3 agency Standard &
Poor's, according to IFR Markets deal data.
The rating agency, started by storied
corporate-investigations pioneer Jules Kroll two years ago, has
rated about $10.6 billion worth of CMBS year-to-date via 11
offerings. These include private-label deals issued by bank
lenders, as well as transactions backed by loans on multifamily
properties underwritten by Freddie Mac, according to IFR
This places the newcomer at the No. 3 market-share ranking
behind Fitch, which rated about $17.5 billion, and Moody's,
which rated the largest amount of CMBS so far this year --
nearly $18 billion.
Kroll also narrowly beat out two other more-tenured
competitors who have been rating CMBS for years: Toronto-based
DBRS, which captured the No. 4 spot for year-to-date market
share, and Morningstar, which came in at No. 5.
Kroll's ascendance was no doubt helped by the fact that S&P,
once a leader in CMBS ratings, found itself all but locked out
of the market to rate CMBS offerings after a slip-up a year ago
on a $1.5 billion deal.
The episode, which involved discrepancies that S&P found in
its ratings for a July 2011 deal, led to bonds being pulled from
the market post-sale, and eroded S&P's credibility.
The debacle allowed companies like Kroll to steal away part
of the sector's business. S&P has recently overhauled its
ratings criteria in an attempt to regain a foothold in the
But Jules Kroll, who points out that his agency rated its
first CMBS transaction prior to the S&P incident -- and has now
rated a total of 19 deals -- says that it is instead a focus on
deep due diligence, insightful analysis, and very selective
hiring of seasoned professionals that has allowed his firm to
quickly gain investors' and issuers' trust.
"Given my legacy, the tone we try to set is that due
diligence counts," said Mr. Kroll, whom many credit with
inventing the modern corporate investigations industry.
"The incumbent rating agencies make a point that it's not
their responsibility to do due diligence, that they're only
reviewing what's presented to them. But the tone we try to set
is that the ultimate goal is to give investors as much as we can
give them to make their own judgments."
Kroll Bond Ratings has already expanded into municipal-bond
ratings and asset-backed securities, and plans to issue its
first corporate rating in the Fall, continuing down that path
with an emphasis on grading financial institutions. However --
sticking to its strengths -- it will not attempt to rate the
debt of sovereign nations.
"Our views, our approach, our embracing of due diligence
over time with surveillance and detailed write-ups, are of
people who are trying to restore trust," Mr. Kroll told IFR.
It's not an accident that the agency has excelled in CMBS.
After initially spending money and time in 2009 developing
non-agency residential mortgage-backed securities (RMBS) ratings
models, Mr. Kroll finally realized that the sector was not
returning anytime soon, and instead turned his attention to the
nascent post-crisis renaissance in commercial mortgage bonds,
another battered asset class.
He sought out some of the most seasoned and well-known
analysts in the industry to head up his new structured finance
"We offer more than a rating; what we view as a product is
the insight into the analysis," said Kim Diamond, who joined
Kroll in December 2010 to head up the firm's structured finance
Diamond was a 21-year veteran of S&P who headed up the CMBS
new-issue ratings group for years and eventually headed the
entire mortgage-bond ratings unit during the tumultuous time
after the crisis hit in 2008.
Frustrated by some decisions that S&P upper management made
in the aftermath of the crisis, Diamond left the firm in 2010.
Diamond herself commanded the overwhelming respect of the
CMBS investor and issuer community, making her a perfect choice
to head up Kroll's new structured finance unit.
"She was well known, seasoned, and emerged from the crisis
with an unscathed reputation," Mr. Kroll said.
Shortly thereafter, Diamond recruited another respected CMBS
colleague from S&P, Eric Thompson, to head up Kroll's
structured-finance surveillance efforts.
"We were known entities to the industry, just resident in a
different place. So there was a predictability of outcome" to
what investors were getting, Diamond said.
While many of the Kroll analysts have rating agency
backgrounds, Diamond says that the firm has made a point to also
recruit professionals from the buy-side, sell-side,
bond-structuring professions, research, and appraisal and
"Rather than taking the standard academic or didactic
approach that many agencies take -- which tends to be very
disconnected from the real world -- we brought in perspectives
of those that had taken part in different parts of the business.
That makes our perspective much more holistic at the end of the
day," she said.
OVERCOMING A STIGMA
Still, it was an uphill battle to gain the trust of
investors or convince underwriters and banks to choose the
upstart to rate new issues.
"It was not written in the Bible that anybody had to put a
Kroll rating on anything," said Mr. Kroll.
One stigma that was hard to overcome: Kroll used the same
pay structure as Moody's, S&P, and Fitch, the harshly criticized
The conflicts of interest arising from this model -- the
notion that the agencies were serving the wrong master in the
run-up to the crisis and therefore were swayed to stamp toxic
securities with Triple A ratings -- have been sharply lambasted
by Congress, investors, and pundits.
"It's become a bit of a shibboleth that 'issuer-pay' doesn't
work," Mr. Kroll said. "Well, what's the alternative? The
investors don't want to pay."
To get his start in the bond-ratings business, Mr. Kroll
acquired an SEC-registered boutique credit rating agency in
2010, Lace Financial, that used an investor-pays model, but soon
discovered that the pay structure was not viable.
"It quickly became clear that investors didn't want to pay,"
he said. Mr. Kroll says his firm recognizes the inherent
conflict that's involved with 'issuer-pays', so there is a
tendency to be more conservative on some ratings, and "that has
cost us some business."
But company executives also point out that the investor-pays
model has its own conflicts, including the fact that large,
influential asset managers have their own vested interests: for
instance, they don't like volatility or downgrades, they like
access to analysts, and there could be the perception that
they're receiving more information than smaller shops.
"The reason that the issuer-pays model got a bad name is
because it was combined with opaque criteria," said James
Nadler, president and chief operating officer at Kroll, as well
as a former executive vice president at Fitch.
Pre-crisis, the rating agencies had unclear criteria, and
therefore could rate securities however they wanted, saying that
an issuer's rationale for a Triple A "generally fit" within the
methodology, Nadler said.
"When the 'issuer-pay' model is combined with transparent
criteria, and transparent analysis, there are fewer conflicts,"
EXPANDING THE BUSINESS
Mr. Kroll feels that the quality of his firm's analysis is
what distinguishes it from the Big 3 rating agencies, and that
there is still opportunistic room for a boutique shop in the
ratings business, especially after the pummeling that the large
raters took over the last few years in the court of public
"The level of criticism and condemnation that these folks
have taken now for several years is non-stop," he told IFR. "If
I was running one of these places, the first thing I would do is
apologize. And offer an explanation."
That may be hard to do for S&P, Moody's, and Fitch, however,
Mr. Kroll said, as they are constrained by lawyers protecting
them from litigation, regulators, and the Dept. of Justice.
But the tattered reputation of the other agencies means that
Mr. Kroll sees selective near-term opportunities in other areas
where his ratings company can prove its analytical worth.
The agency hopes to replicate the success it has found in
CMBS this past year in other sectors, and has already rated a
subprime auto ABS transaction, with two more in the queue, and
is in the process of rating its first container-lease deal.
Moreover, the bigger picture for Kroll Bond Ratings expands
beyond just grading transactions and companies: Mr. Kroll
intends to acquire an information provider/data company and
combine it with the agency over the next year.
"It is not our intent to only be a ratings business," he
In order to make such an acquisition, however, and for it to
be profitable, he has to make sure that there is a sturdy
platform to build on.
"I'm not doing this as a religious experience," Mr Kroll
said. "I'm doing this to achieve an economic return, and I think
the marketplace will ultimately reward us economically if the
product is viewed as independent and of high quality."
"The minute it's not viewed as independent and high quality,
(The International Financing Review is a Thomson Reuters
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