Michael Macchiaroli
Associate Director
Office of Risk Management and Control
Division of Market Regulation
U.S. Securities and Exchange Commission
450 Fifth Street, NW, Washington DC 20549
Response to Interim Report on the Role and Function of Credit Rating Agencies in the Operation of the Securities Markets (as required by S. 702(b) of the Sarbanes-Oxley Act of 2002, U.S. Securities and Exchange Commission, January 2003)
[Sent by e-mail 4 March 2003]
The ACT is the UK’s professional body for those responsible in companies for corporate finance and treasury. We have over 3000 members and associate members working in companies and in the financial services industry.
We have followed the SEC’s published material on the review of rating agencies with interest. The US agencies service the UK and European markets too and the nature and form of US regulation of the agencies is important to us. Indeed, our February Journal includes a summary of the SEC’s January paper.
We know that you are due to publish further material soon. However, we felt that there is one narrow topic on which we should comment now as we feel there may be few bodies which would comment from the rated company’s point of view. Individual companies may be more constrained in commenting.
The topic is competition among agencies and the possibility of more recognised agencies.
For UK and European companies seeking ratings, the market demands ratings from two of the recognised agencies.
A company devotes a lot of time to the relationship with rating agencies. While there may be only one formal meeting with the agencies a year, that takes a lot of preparation and care is taken that the agencies are kept up to date and briefed during the year, before company announcements etc. The companies stand by to answer any questions from the agencies and the agencies can ask to meet any executives of a company. In the UK, the FSA acknowledges that companies give the agencies that level of access and information – although it probably technically contravenes the current Listing Rules.
It is not practical to provide that level of involvement with more than a couple of agencies. Introducing a company to a new agency is even more time consuming and intensive. More so for harder-to-understand credits (so-called “story credits”) – and it is particularly in such cases that the agencies can add value, of course.
The fees paid by the company for rating is relatively modest and the barrier to dealing with more agencies is rather management time than direct cost.
So we feel that structurally it would be hard for new agencies to spring up which cover the broad European corporate market. In the past those who have tried have started with unsolicited ratings – which they have, in draft, pitched mischievously (too high or too low – both equally damaging to the company) in the hope that the companies would seek to rectify it and end up giving them price-sensitive information and build a relationship they would eventually have to pay fees for.
So from the rated company’s point of view, prospective new agencies may serve to keep agency fees low and to keep the agencies on their toes. However – and the reason for this note – we feel that they are not really potential new service providers from the general rated company point of view..
It seems likely that similar considerations would apply in the broad US market for corporate ratings.
This note is on the record and may be freely quoted.
John Grout, Technical Director
The Association of Corporate Treasurers