Despite continuing criticism of the big credit ratings agencies, the challenges facing potential competitors to the big three – Fitch, Moody’s and Standard & Poor’s, remain significant.
A new Harvard Business School case study suggests new entrants effectively face a “Catch 22″ situation.
Morningstar and Meredith Whitney Advisory Group are attempting to make inroads, focussing on corporate and municipal bonds, respectively. Now comes Kroll Bond Rating Agency, founded by Jules Kroll, a pioneer of the corporate risk consulting and privacy security industry. Kroll’s initial focus is on commercial mortgage-backed securities and other structured and public finance.
The HBS case notes that:
- Many users of ratings were obliged to look only at ratings issued by Nationally Recognized Statistical Ratings Organizations, so any serious entry into ratings would require NRSRO designation.
- However, getting through the SEC application process could be a slow and expensive. In particular, a ratings agency had to be in business for at least three years and provide a list of bona fide customers to apply for NRSRO status. But getting customers interested would pose a challenge without that status.
- An alternative to getting a brand new certification would be to join forces with one of the smaller NRSROs.
Other challenges facing new entrants include hiring enough skilled analysts and support staff quickly enough.
The full HBS Case Study on Kroll can be purchased here.