* No sign of S&P, Moody's, Fitch dominance fading
* Credibility among issuers and investors difficult to win
* Rules at SEC and ECB bolster big three
By Marc Jones
LONDON, Jan 20 For all the outrage over the role
of the big three credit-rating firms in the financial crisis,
they show no sign of losing their grip on the highly profitable
That has not stopped new contenders joining the 50 or so
lesser-known rating firms that have long been trying to grab a
bigger slice of the business.
The financial crisis should have helped their cause. The big
firms - Standard and Poor's, Moody's and Fitch - lost much kudos
when many of the complex U.S. housing market-linked loans that
they rated top-notch triple-A turned out to be worthless.
Many of the newcomers are touting themselves as preferable
alternatives. A Lisbon-based firm called ARC that launched last
week says its ratings will be far cheaper than the dominant
players and will take a more balanced view so be less volatile.
But official figures show how hard it is to make headway.
S&P, Moody's (both 40 percent) and Fitch (17 percent) are
holding onto over 95 of the industry's marketshare. S&P made
$850 million from its ratings business last financial year, up
18 percent on the year before. Its latest results show a profit
margin of 42 percent.
Dave King from the South African GCR agency, one of five
small agencies that have come together to form ARC, acknowledges
"The rating agency business is a catch-22," King said. "You
don't get a client until you have credibility, but you don't get
credibility until you have a client."
"You could put a billion dollars into it but you'd still end
up blowing it over time."
After at least two failed launch attempts, ARC finally got
off the ground last week, almost three months late, with an
event at London's swanky Ivy restaurant.
It hopes to win business with pay-as-you-go ratings and by
ditching the convention of splitting ratings into investment
grade or junk. Besides the standard startups' promise of cheaper
prices and less 'cyclical' ratings, ARC says it will also take
into account issues as broad as U.S. monetary stimulus and
worldwide cyber attacks.
But its main potential strength is that it gathers five
existing agencies from Portugal, India, South Africa, Malaysia
and Brazil in an alliance aimed almost purely at creating enough
scale to compete with the big three.
Between them they have roughly 6,000, mainly emerging
market, firms who use their ratings. The hope is that around 600
of them will soon be big enough to borrow on capital markets
For that, such firms will need more stringent
'international' ratings and that's where ARC, which has gained
clearance from European rating authority ESMA, comes in.
"The only reason why they (firms) are using the hegemony of
the big three (S&P, Moody's and Fitch) is because there is no
alternative," said Mohd Razlan Mohamed, head of Malaysia's MARC
ratings, one of the ARC agencies.
"I have people asking me all the time if there is someone
else, so we have all this low hanging fruit of our local
PROBLEM WITH AUTHORITY
ARC must still overcome the problem raised by King: if
those looking to buy the bonds and other types of securities
don't recognise a rating firm, the issuers of those bonds are
less likely to use them.
Morningstar and management consultancy Kroll, as well as
China's Dagong have also joined the landscape in the last couple
of years, but they are yet to have a major impact.
"Clearly clients look at ratings and benchmarks look at
ratings... so it affects what we can and cannot buy," said
Daniel Loughney, a portfolio manager and senior vice president
at AllianceBernstein Fixed Income.
"It is a function of who (among the rating agencies) the
client wants. It tends to be one of the big guys and I don't see
The third and final hurdle for new entrants to the rating
industry is one of the biggest, created by authorities in both
Europe and the United States.
There are just 10 agencies on the SEC's list of Nationally
Recognized Statistical Rating Organizations (NRSROs), while in
Europe, the European Central Bank only accepts the ratings of
four - the big three plus Toronto-based DBRS - on the collateral
that banks use to access its ultra-cheap loans.
That effectively means that issuers will use only those
agencies that can ensure investors will be able use their
securities at places like the ECB.
"We know this (not being one of four on the ECB list) is an
issue," said Jose Pocas Esteves CEO of ARC. "Getting ourselves
recognised at the ECB is one of our targets."
That will take time. It took DBRS two years of protracted
negotiations to get its ECB recognition in 2007.
In the meantime, GCR's King hopes the firm's prices will be
enough to tempt issuers. "We think we can do this cheaper than
anyone else, so if we can't do it, nobody can."