Kroll Sees Supplanting S&P in Rating Commercial Mortgage BondsBloomberg May 21, 2012 Back to press
Jules Kroll says his two-year-old credit ratings firm is poised to surpass Standard & Poor’s providing grades on bonds backed by commercial mortgages, capitalizing on a stumble last year by his larger rival.
Kroll Bond Ratings Inc. has focused on grading securities backed by offices, hotels and shopping malls since S&P was frozen out of the segment by Wall Street banks after derailing a $1.5 billion sale by Goldman Sachs Group Inc. and Citigroup Inc. in July. The firm, which started rating securities backed by commercial mortgages last year, has 14 percent of the U.S. market, according to Commercial Mortgage Alert, a newsletter.
“We could very easily replace S&P as the No. 3 rating agency in that sector,” the 71-year-old risk-consulting executive whose former firm’s work included probing the hidden assets of Saddam Hussein’s Iraqi regime in the 1990s said yesterday in an interview at Bloomberg LP headquarters in New York. “Looking at the business today versus a year ago when we hadn’t issued our first rating yet, it’s pretty good progress.”
The company, started after the largest firms assigned top marks to U.S. subprime-mortgage bonds before that market collapsed in the credit crisis, will be viable as a business when it reaches an annual pace of $40 million to $50 million in revenue, he said in the interview. By the end of the year, Kroll said, he expects to be halfway there and “cash-flow positive.”
“We were helped materially by the ineptitude and the continued ineptitude of S&P,” Kroll said.
Ed Sweeney, a spokesman for New York-based S&P, the unit of McGraw-Hill Cos. that’s the largest ratings firm by revenue, said in an e-mail that “investors value the knowledge and experience our of analysts in CMBS as well as the many other asset classes we cover.”
S&P was ranked third globally and Kroll was sixth last year in rating commercial mortgage bonds, according to Commercial Mortgage Alert.
S&P hasn’t rated a so-called conduit deal, the biggest part of the market, since July, according to data compiled by Bloomberg. On May 16, the firm assigned preliminary ratings to mortgage bonds backed by a single mall and arranged by JPMorgan Chase & Co.
Issuance of commercial mortgage bonds may decline this year as Europe’s sovereign-debt crisis rattles markets, sending relative yields on the debt last week to the widest this year. Wells Fargo & Co. forecasts $25 billion of offerings in 2012. About $28 billion of the securities were issued last year, Bloomberg data show.
Kroll issued its first municipal debt rating in March, giving Connecticut an AA grade. The mark is Kroll’s third- highest, matching the level the state receives from S&P and Fitch Ratings. Moody’s Investors Service rates the state Aa3, its fourth-highest grade.
“The most important difference is the analytics,” Kroll told Bloomberg editors and reporters. “I would say the average report, as opposed to a Moody’s, it may be as much as 30 or 50 percent more content.”
Michael Adler, a spokesman for New York-based Moody’s, the second-largest ratings firm, declined to comment on Kroll.
Kroll sold Kroll Inc., his investigations and security company, to insurance brokerage Marsh & McLennan Cos. for $1.9 billion in 2004.
In 2010, he purchased Lace Financial as a vehicle to issue ratings through a Nationally Recognized Statistical Rating Organization, a designation given by the Securities and Exchange Commission. Morningstar Inc., billionaire Joe Mansueto’s mutual- fund data company, also bought a credit-rating business that year.
After studying the feasibility of having investors pay to access ratings, Kroll said he decided that the only business model capable of succeeding would be to charge bond issuers, as the other ratings firms do.
Kroll also said he made a mistake by initially concentrating on rating bonds backed by residential mortgages. Issuance has yet to revive in that market, he said.
“We concentrated on the area where the problem was but when we went to kick the football, there was no football there,” Kroll said.
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