Did the three major ratings agencies engage in a whisper campaign against a smaller competitor? Kroll Bond Ratings Agency founder Jules Kroll was reported as “irate” over what he says is a “coordinated effort” by Moody’s, S&P and Fitch to spread rumors of an SEC investigation into a recent divisional acquisition. At the center of the issue is an Securities and Exchange Commission inquiry over the impact a private equity buyout might have on ratings quality amid potential increased profit margin pressure.
Kroll claims competitors spreading rumors of SEC evaluation of acquisition
At issue is a recent private equity investment from Wharf Street in Kroll, who purchased a 90% stake in the ratings agency in November. A related inquiry of an acquisition by Carlyle Group and Warburg Pincus of credit agency DBRS is also said to be underway, Asset-Backed Alert reported on March 18. The SEC is said to be asking questions about the takeover and its impact on management, but has not initiated a formal investigation, the report said.
Kroll claims that the larger ratings firms are spreading rumors of a dark SEC investigation at industry events to preserve their grip on the ratings business. “Fitch, S&P and Moody’s, the people that are circulating this, are saying the SEC is investigating the implications of being owned by a private equity firm,” he said. “It’s nothing more than dirty tricks.”
Spokespeople at Moody’s S&P and Fitch, for their part, all denied the allegations, the report noted.
“When we had the change in ownership control of the business, at our initiation we wanted [the SEC] to meet the [new owners] and introduced them before we closed the deal,” Jules Kroll was quoted as saying while explaining the transparency associated with the acquisition. “They had been invited to our board meetings, and since then we meet with them more frequently.”
Kroll investigation said to focus on new owners impact on ratings agency product
The SEC investigation is reported to center on the motivations of the new owners and if, as in many private equity deals, they would seek to boost shareholder value and quickly flip the business in 3 to 5 years after reducing costs. Such an activity might provide incentive for Kroll and DBRS “to win more business by lowering their rating standards.”
Carlyle, however, has stated their goal is to triple DBRS’ market share rather than simply cut costs. Overall the investigation remains somewhat shrouded in a lack of clarity. “The [SEC] has asked specific questions about Kroll and DBRS, but they won’t answer any questions in return,” one market professional was quoted as saying. “It’s a one-way street.”
This article appeared in ValueWalk
Photo: Brian Smithson