Agencies at Odds Over New Ratings
Credit rating agencies are sparring in public over new ratings as they seek to enhance reputations damaged during the financial crisis.
Rating agencies were criticized for giving triple-A ratings to complex securities backed by risky mortgage debts that later fell in value. Since then, they have tried to improve their criteria, and the Securities and Exchange Commission has required that arrangers of structured finance deals make information available to the agencies, even if they have not been hired to rate the transactions.
One byproduct of these efforts has been a tendency for rating agencies to disagree in public about the creditworthiness of complex securities.
The latest example came this month when a near-$800 million bond deal backed by U.S. prime mortgages was sold to investors with triple-A ratings — provided by Standard & Poor’s and DBRS, a smaller competitor based in Canada — on some tranches.
Fitch Ratings issued a statement saying it would not have rated the bonds triple A.
It said it provided “feedback” on the transaction to the arranger, Credit Suisse , and “was ultimately not asked to rate the deal due to the agency’s more conservative credit stance”.
Steven Vames, a Credit Suisse spokesman, said it was common for an issuer to engage multiple rating agencies to look at a deal and ultimately choose a subset of those agencies to rate it. In March, Moody’s said: “Some recent cases have come to market for which we believe increased risk has not been adequately mitigated for the level of ratings assigned by another agency.”
In particular, Moody’s faulted ratings issued by S&P, Fitch and DBRS on asset-backed deals.
One portfolio manager who invests in asset-backed securities said: “It is good to have dialogue [among the rating agencies].
“Rating agency analysts know they will be scrutinized,” the investor added. “To the extent that [the dialogue] continues, it lets a lot of investors have a broader perspective.”
Grace Osborne, head of mortgage-backed ratings at S&P, said: “Each of the credit rating agencies has their particular view on credit risk and they want to make sure the market understands that view and how [it is] different from the others.
“It only helps to highlight where there is a divergence of opinion,” she added. “Knowing where [one agency] is seeing something where another didn’t is only an advantage to an investor in a marketplace.”
Claire Robinson, a managing director in the structured finance business at Moody’s, said: “Post-financial crisis, the environment has changed. The market has been clear about the desire for diversity of opinion, and investors want more information.”
Kevin Duignan, head of Fitch’s US securitization group, said that publishing an assessment on a deal that an agency was not formally rating “is certainly a more common event since the financial crisis. Most investors see it as healthy.”
The market for securitizing home loans not backed by Fannie Mae, Freddie Mac or other government-related entities has been moribund since the crisis.
But of the handful of so-called private deals that have emerged, rating agencies have voiced their disagreement on how to assess most of them, even if they were not formally rating the bonds.