A Shake Up is Coming in the Credit Rating Space


New York – A business of K2 Global Partners, a risk services company, Kroll Bond Ratings will start offering issuer-paid ratings services in July, potentially shaking up an industry that fell in disgrace after its conduct in the time leading to the most recent credit crunch.

Kroll Bond Ratings will enter the space playing a tête-a- tête with the current players , two of which control over 75% of the industry (Moody’s Investors Services and S&P). The third one, Fitch Ratings, holds over 20% of the market share. The main players have not lost market share despite their diminished reputation, which presents both a challenge and an opportunity for Kroll.

The firm’s founder, Jules Kroll, who also created Kroll Associates in 1972 and co-founded K2 Global Partners in early 2010, has been called the “father of the modern investigations industry.” He plans to leverage his experience, auditing expertise and due diligence methods to challenge the current players in the credit ratings space.

Predictive modeling will not be the cornerstone of this company’s ratings, but only a piece in the analysis. Kroll will have his analysts checking on mortgages quality not by blindly following financial models or reports, but by knocking on doors to find out, first-hand, if people are still living there.

Kroll is building a staff of 25, including experts in investigation and auditing. One of the hires done so far is Jerome Fons, a former Moody’s Investors Service executive who has been critical of the rating agencies. In a statement before the NAIC Working Group on Rating Agencies dated September 24, 2009, Mr. Fons expressed:

“Unfortunately, the major rating firms willingly traded their reputations for short-term profits. They allowed themselves to be played off of one another in an effort to maintain (or perhaps increase) market share. Assumptions underlying many rated structured products were not challenged or updated. Even as the housing market began to lose stem, the major raters did not incorporate this development into their models.”

Kroll Bond Ratings will implement the issuer-paid model followed by the other player in the space, but it will also aim at engaging a consortium of institutional investors who will require a Kroll Bond Rating before investing in a product. Potential investors include pension funds, endowments and universities.

Kroll Bond Ratings intends to offer ratings in the areas where incumbents have lost credibility (if not market share). The firm will start out by tackling mortgage-backed securities of a commercial and residential nature, Kroll said in an interview. After breaking into these securities, the firm will rate other products such as municipal bonds.


About Author

Leave A Reply