Pressure from Congress in the wake of the global financial crisis led the SEC to expedite its lethargic and opaque process of registering rating agencies. As a result there are now 10 Nationally Recognized Statistical Ratings Organizations (NRSROs).
A couple of new players circumvented bureaucracy by acquiring smaller firms that already had NRSRO status. In August 2010, Jules Kroll, a pioneer in corporate security consulting who had sold his business to Marsh & McLennan in 2004, acquired boutique rating agency Lace Financial. In May that year, investment research firm Morningstar acquired Realpoint, another NRSRO, for $52 million.
Newcomers claim they have an edge: They are unencumbered by the legacy baggage of S&P and Moody’s, each of which claims a roughly 40% global market share.
“The incumbent ratings agencies who were sued after the financial crisis have had their ratings become more formulaic so as not to relive that movie,” says Jim Nadler, president of Kroll. “So they are doing less in-depth analysis, while we are doing much more in-depth work in presale reports in the structured finance area.”
SEC data shows that Kroll is taking market share away from S&P in structured finance ratings, says White.
In another innovation, Dagong Europe is disentangling sovereign ratings from corporate ratings. Now some companies in Europe may be rated higher than the sovereign ratings for their respective countries, says Carola Saldias, a financial institutions analyst at Dagong Europe in Milan.
The next NRSRO up for sale is DBRS (originally known as Dominion Bond Rating Service) of Canada. According to media reports, investment bank Perella Weinberg Partners has been hired to arrange an auction.