| Bonds Online |
 |
|
| 5/10/2013Market Performance |
| Municipal Bonds |
|---|
|
S&P National Bond Index
|
3.00% |
|
|
S&P California Bond Index
|
2.96% |
|
|
S&P New York Bond Index
|
3.13% |
|
|
S&P National 0-5 Year Municipal Bond Index
|
0.70% |
|
|
| S&P/BGCantor US Treasury Bond |
400.09 |
|
| More |
|
| Income Equities: |
|---|
| Preferred Stocks |
|---|
|
S&P U.S. Preferred Stock Index
|
848.03 |
|
|
S&P U.S. Preferred Stock Index (CAD)
|
636.26 |
|
|
S&P U.S. Preferred Stock Index (TR)
|
1,701.05 |
|
|
S&P U.S. Preferred Stock Index (TR) (CAD)
|
1,276.26 |
|
|
| REITs |
|---|
|
S&P REIT Index
|
174.07 |
|
|
S&P REIT Index (TR)
|
425.30 |
|
|
| MLPs |
|---|
|
S&P MLP Index
|
2,469.58 |
|
|
S&P MLP Index (TR)
|
5,428.50 |
|
|
See Data
|
|
|
|
 |
|
|
|
|
|
|
Credit Rating Agency Reform Could Up the Stakes for Money Managers |
Securities Industries News - April 11, 2010 - by Carol E. Curtis
In the wake of the financial meltdown, credit rating agencies such as Standard and Poor’s and Moody’s Investors Service have been widely criticized for giving high ratings to securities that later proved worthless.
So it’s not surprising that a critical part of the Senate’s financial reform bill -- also known as the Dodd bill -- deals with increased credit rating agency oversight.
The securities industry has a vital stake in the outcome.
Credit rating agencies are an integral part of the capital markets, providing assessments of default and loss probabilities on financial instruments worldwide. Their ratings reflect their reviews and analyses of everything from sovereign debt and public finance debt issues to traditional corporate bonds, asset-backed securities, and a host of structured instruments.
Depending on what comes out of the Dodd legislation, the impact on the operations of mutual fund and institutional money managers could be significant.
The bottom line: They could be forced to set up their own systems and infrastructure for conducting due diligence on the creditworthiness of bonds and structured securities they invest in.
Right now, a battle royal is heating up between Democrats in Congress, led by Senate Banking Committee member Jack Reed, D-RI, and rating agencies bent on defeating key provisions of the Dodd bill.
Reed is accusing lobbyists for the rating agencies, particularly Standard & Poor’s, of enlisting Republican Senators in their efforts to kill certain provisions of the bill relating to credit rating agency reform. In an April 6 statement, Reed said that “This cynical attempt by Wall Street lobbyists to kill Wall Street reform before it sees the light of day must be resoundingly rejected.”
Credit rating agencies registered with the Securities and Exchange Commission are known as Nationally Recognized Statistical Rating Organizations, or NRSROs. While there are 10 firms currently registered, three of them -- Standard & Poor’s Rating Services, Moody’s Investors Service, Inc., and Fitch, Inc. -- command 80 percent to 90 percent of the market.
John Jay, a senior analyst at Boston-based research firm Aite Group and an expert on the rating agencies, says that the way the system operates now, the three dominant rating agencies constitute a “government-sponsored oligopoly.”
In the prospectuses of many new issues, he points out, there is a requirement for an NRSRO rating. NRSROs are compensated up front, with payments made when the issuer receives the proceeds from the issuance of debt.
“There is a built-in investment in providing [NRSRO] rating stamps quickly and often,” he says.
Weaning Away
Importantly for the securities industry, the bill includes provisions that could wean the industry away from such heavy reliance on NRSRO ratings.
Specifically, the bill says that certain federal agencies must review their regulations and “remove any reference to credit ratings or a credit ratings requirement and to introduce, instead, the use of a standard of creditworthiness that is not related to credit ratings.”
This would in turn force more responsibility onto the buy side, including mutual funds and institutional money managers, to do their own due diligence, and/or seek other assessments of credit risk.
The impact on their operations would be significant. “Because of the laws in place, the buy side was really not incentivized to do its own work,” Jay says. “It looks to the NRSROs as a kind of Good Housekeeping seal of approval.”
If the buy side were forced to do its own due diligence on creditworthiness, it would need to build its own infrastructure for credit analysis, Jay says, including getting the right people and data in place. The firms might also look for alternative agencies that are not NRSROs, opening up the market to more players.
Other experts agree that this would be a good thing. “Market participants should reduce their dependence on ratings in making investment decisions,” said Kurt Schacht, managing director of the CFA Institute Centre for Financial Market Integrity, in recent testimony before the House subcommittee on capital markets.
Schacht added that there is convincing evidence that the credit rating agencies did a poor job of performing their due diligence on things like testing of default risks, lack of familiarity with new structured products, and excessive reliance on fee income from issuers.
“Eliminating requirements [for NRSRO ratings] over time…would force investors to seek additional and alternative assessments of credit risk,” he said.
Liability Provision
Another important part of the Dodd bill – and one the lobbyists are targeting --is a provision that would also make life uncomfortable for the NRSROs by making it easier to sue them.
Specifically, the bill modifies the requisite “state of mind” requirements for private securities fraud actions against a credit rating agency for monetary damages. In bringing suit, the bill says it is “sufficient to state with particularity facts giving rise to a strong inference that the credit rating agency knowingly or recklessly failed to conduct a reasonable investigation of a rated security with respect to factual elements relied upon by its own methodology.”
Taken together, the provisions present a significant challenge to NRSRO dominance over credit ratings.
Meanwhile, Jay thinks the NRSROs are in for a hard time no matter what Congress does. Their margins have been eroding, he says, as issuers become emboldened to seek out other methods of financing that might lessen the NRSRO’s influence, such as loans or private transactions. “Their franchise is going away,” he predicts. “In the real world, over a five-year horizon, the NRSRO market presence will diminish.”
|
|
|
|
|
|
| Partner Market Place |
|
|
|
| Stuff to look at |
Yield and Income Newsletter: A must have for income investors. subscribe NOW
S&P Commentary and Newsletters: S&P
|
|
| BondsOnline Advisor |
Income Security Recommendation January 2013 Issue.
Keep up with monthly, in-depth coverage of fixed income market strategies, commentary, and insights as seen by our sources. Sign up for the free BondsOnline Advisor now!
Unsubscribe here [+] |
|
|
|
|
