* 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
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
"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
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
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.