April 20, 2007 / 8:40 PM / 12 years ago

Canada's DBRS joins global debt rating club

TORONTO, April 20 (Reuters) - DBRS, the Canadian bond rating agency, is expanding in the United States and Europe by focusing on market niches and meeting rising demand for analysis of new and complex debt securities, executives said.

DBRS, formerly Dominion Bond Rating Service, is the newcomer and fourth player in international ratings, alongside Moody’s (MCO.N), McGraw-Hill Cos.’ MHP.N Standard & Poor’s unit, and Fitch Ratings, owned by France’s Fimalac SA LBCP.PA.

“If you’re going to rate companies, you have to look global instead of looking local,” founder and President Walter Schroeder said in an interview. “So you have to be in Europe, you have to be in North America, and ultimately in Asia.”

Structured finance — such as asset- and mortgage-backed securities and increasingly complicated debt packages — took off in a big way a decade ago. Its rapid development makes it a key area for DBRS’s future revenue growth, Schroeder said.

He also cites the incoming Basel II banking regulations as a big opportunity. Due to take effect in 2008 and 2009, the risk-management rules will change how international banks allocate capital to cover risks, and should boost demand for ratings, Schroeder said.

DBRS got a modest start 30 years ago in Toronto, when Schroeder left a Bay Street investment dealer to start rating short-term commercial paper.

Two years later, the firm began covering corporate and sovereign debt. Foreign banks entered Canada in the 1980s, “a big plus” for DBRS because they needed domestic ratings.

“We got virtually all of them,” said Schroeder, who declined to divulge the private firm’s financial information.

It has expanded to about 260 people, including Schroeder’s son David, who is chief operating officer.

In 2006, it hired former TD Securities vice-chairman Peter Bethlenfalvy as managing director of global corporate finance.

“They were looking for someone who could help them grow outside of Canada, but had an understanding of Canada,” said Bethlenfalvy, who splits his time between New York, Toronto and London.

DBRS’s U.S. expansion is helped along by the firm’s three-decade history, which gives it credibility, and a desire among regulators and investors for more competition in a field dominated by Moody’s and S&P, Bethlenfalvy said.

Corporate debt issuance is rising by about 15 percent a year and structured finance by more than 20 percent, he said, so the pie is growing fast.

DBRS tries to concentrate on less-crowded market segments where it can be “relevant,” he said. It also tries be first on the Street with comment following major corporate events.

“We think there’s room for four ratings agencies, but not necessarily four ratings (per issue),” Bethlenfalvy said.

Financial institutions and natural resources are key areas of global coverage. Niches include smaller banks and private placements in the United States, and regional banks in Europe.

Of roughly 1,500 ratings on banks, governments and corporations, 70 percent are for non-Canadian entities.

“A big part of it has to do with Walter’s strategy in the early days,” Bethlenfalvy said. “It was to provide ratings for international issuers coming to Canada.” With DBRS’s geographic expansion, the firm subsequently got the green light from most of the parent companies for global ratings as well.

The founder has regularly received overtures to buy the company, but said he is not interested at this stage.

“For the time being we’re fine with the way we are. It would probably take quite an overwhelming offer of some sort to get me to change my mind,” Schroeder said.

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