LONDON 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 industry.
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 difficulties.
"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 like London.
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 clients."
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 recognize 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 that changing."
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 recognized 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."
(Reporting by Marc Jones; Editing by Ruth Pitchford)