Byline: Philip Moore
If in doubt, blame the ratings agencies. Are you having to pay an extra $50m (e50m) in interest because a coupon step-up clause has been triggered? Clobber the ratings agencies. Are you in the doghouse with your boss because your credit portfolio has lost 20% of its value in the past 12 months? Pass the buck on to the agencies. Are you a tad embarrassed because you went round telling everybody what a fabulous investment Enron was? It's not your fault - it's the ratings agencies that are to blame.Ratings-agency bashing has become something of an international sport, often played out on the pages of newspapers that ought to know better, and it reached its most insane crescendo when some observers chose to apportion blame to the agencies for the alleged fraud at WorldCom. Gary Jenkins, managing director of credit research at Barclays Capital, quite rightly points out that fraud has been part of the commercial landscape since the year dot. "It's no good looking to the ratings agencies or even to the accountants in cases where the people who are primarily to blame are those that are running the companies themselves. Agencies and accountants can do checks, but if they are being misled there's very little they can do about it," he says.
Naturally enough, the agencies echo this, although they add that a surprising number of people in the market still fail to understand that a ratings agency's verdict on a company can, by definition, only be as watertight as the information passed to it by the borrower in question. Against that background, the marvel is not so much that investors are now reported to be doing more of their own fundamental credit analysis, but that some of them did so little of it in the first place, becoming unduly reliant on the agencies to make involuntary investment decisions for them. For their part the agencies say that they are only too delighted to see institutions shoulder more of the research burden themselves.
Barbara Ridpath, managing director and chief credit officer at Standard & Poor's in London, says: "We have always said that there is a health warning associated with our ratings, that they are not a substitute for an investor's own analysis of the appropriateness of a given security for an investor's portfolio."
None of this is to suggest that institutional investors can ever supplant the ratings agencies, for a whole host of reasons. First, there is the simple issue of manpower. Paul Taylor, managing director of Fitch in London, says: "There's a lot of talk at the moment about investors being able to do the research themselves and relying less on the agencies. But we are the smallest of the three main ratings agencies and we have 1,400 people dedicated to credit research. No institutional investor is going to come anywhere near that intensity of coverage. Those investors that are making a lot of noise about doing their own research will often have credit analysts covering 100 or more companies each. Our corporate analysts cover an average of eight, which shows you how much more detail we can go into.
"Of course investors should be doing their own work on issues such as liquidity, pricing, and fit into their particular portfolio, but to replicate in full the credit work that we do would be incredibly difficult."
Probably more important, there is the role agencies play as impartial external arbiters. However imperfect the system may be, the fact remains that the majority of institutional investors can invest only in bonds that are rated by at least two agencies. The result, says Jenkins at Barclays, is that "if the agencies weren't there, we would have to invent them ourselves. …