Rating Agency Wars Continue to Heat Up

Recently, we noted that Moody’s had been critical of other rating agencies for their overly generous ratings on recent asset-backed financings (see post of March 20th).  We wondered if Moody’s motivation was based only in its desires to provide the market with a consistently more objective point of view and to not have all the nationally recognized rating agencies return to the complacent days of the last decade and before the market crisis.  We hoped that the motivation was not one based on Moody’s not being asked to rate some or all of these programs.

Well, perhaps not surprisingly, last week Fitch jumped into the pool by blasting Standard and Poor’s and the Canadian based agency DBRS for their work on a recent mortgage-backed bond issued by Credit Suisse.  In a much more “connect the dots fashion” Fitch let it be known that they had not been asked to rate the issue and, if they had, they would have found serious faults in the underwriting or due diligence process that led to unreliable projections for valuations of the underlying properties.

In a perfect world, Fitch’s conclusions would seem to indicate a real and significant difference in  rating methodologies between Fitch, S&P and DBRS in an important area of the rating process.  Such news would be good for investors as it might indicate that in some cases, issuers might be looking to shop for softer treatment from some rating agencies and, depending on an investor’s risk tolerance, relying on a more conservative rating agency’s analysis might fit certain types of investors better than others.

Other, perhaps more jaded observers, might as we discussed in our last article on this topic, be inclined to believe that the dissent might be more tied to being left out of the process than any substantial disagreement with the work of S&P and DBRS in this transaction.  We are not ready to align ourselves with that decidedly more cynical view of the situation but certainly it remains one area where holders need to stay on their toes.  We, for one, would like to see a greater diversity in views making its way into the rating analysis, as it would make for a better overall outcome if folks became accustom to challenging conventional wisdom on a routine and not only on an exception basis.

About markferraris
Managing Principal Orchard Street Partners LLC

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