NEW YORK–(BUSINESS WIRE)–Kroll Bond Rating Agency (KBRA) is responding to a Wall Street Journal article published on October 7th entitled “Investors Should Fear More Competition Among Ratings Companies.” While it is not KBRA’s practice to respond to press articles, the thesis and conclusions in this article are based on a number of factual errors that we feel compelled to correct. Further, the premise that investors should fear competition is off the mark. Indeed, one does not have to go back too far in history to recall the fallout of less competition among rating agencies.
Most notably, the author incorrectly states that in his defined time period (June through September) the three European CLOs rated by KBRA had the highest levels of debt relative to equity. This is false. A cursory review of the non-KBRA rated European CLO universe in this time period indicated at least six deals with higher leverage, and there may indeed be more.
The author also suggests that KBRA requires lower enhancement on tranches for European CLOs, by highlighting three deals in a time period that saw dozens of CLOs rated and issued. Given variances in structures and portfolio composition, it is impossible to infer from such a small sample size whether the deals had higher or lower credit quality than other deals in the market. Further to this point, the KBRA-rated deals were for three of the largest, most-seasoned managers in the European CLO market, which is generally a credit positive.
Another factual error in the article is in the lead-in chart, which is inaccurate and misleading. KBRA did not assign ratings on the AAA tranche of the three deals named in the article, nor were we asked for our feedback on enhancement levels for those AAA tranches. It is also unclear what data the author used to calculate the average enhancement for the most senior tranches on KBRA-rated deals. The correct average subordination for the AAA tranches of the KBRA-rated European CLO transactions is 38.17% (not 34.83%, as reported), which is actually higher, not lower, enhancement than the reported subordination on AAA tranches of non-KBRA rated deals (37.71%).
KBRA challenges the premise of the article that competition should be feared, and strongly believes that delivering higher quality information to investors creates positive outcomes for the market. KBRA was established to provide timely, in-depth and transparent credit analysis and research to a market that was poorly served by the incumbent rating agencies. In pursuit of this mission, investor support has helped make KBRA the largest rating agency established after the Global Financial Crisis.
KBRA hopes that no market participants were misled by the Wall Street Journal article and welcomes further dialogue with investors.
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About KBRA and KBRA Europe
KBRA is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider, and is a certified Credit Rating Agency (CRA) by the European Securities and Markets Authority (ESMA). Kroll Bond Rating Agency Europe Limited is registered with ESMA as a CRA.
Kate Kennedy, Senior Managing Director
Caitlin Colvin, Managing Director