S&P Global share price collapsed today. The background to this is the company’s outlook, which has already been significantly corrected after just one month. What reads like bad news also contains a hidden positive signal.

The embarrassment for European credit rating agencies is certain even before the voting has started.

“US Securitzation Awards 2022 – voting now live!” This is the call from GlobalCapital, inviting market participants to vote for the best rating agency when it comes to securitization. This is the choice:

S&P Global Ratings reported a revenue decrease of 15% to $868 million in the first quarter of 2022. Transaction revenue decreased 31% to $404 million. Transaction revenue was negatively impacted by a year-over-year decrease in debt issuance across all categories, but particularly within high-yield, which decreased approximately 68% year-over-year. Non-transaction revenue increased 7% to $464 million due to growth in annual fees, and in CRISIL revenue.

Revenue for Moody’s Investors Service in the first quarter of 2022 was $827 million, down 20% from the prior-year period, as geopolitical concerns, rising yields and elevated market uncertainty adversely affected issuance in all asset classes. Foreign currency translation unfavorably impacted MIS revenue by 1%.

DBRS Morningstar will benefit from LCD data and news, supporting credit analysts and credit investor workflows.

S&P Global Market Intelligence’s Leveraged Commentary & Data (LCD) combines real-time news, data, tools, and analysis on the U.S. and European leveraged loan, high-yield bond, distressed, and investment-grade corporate markets. Produced by S&P Global’s own team of experienced journalists and analysts, LCD provides investors with the market-making news and in-depth research they need for their segment.

How does Morningstar think it will make money by buying this unit from its competitor? How do they think about the justification and financial value creation from the 11-12 times sales multiple paid? It was not a voluntary sale from S&P Global. Since it was a forced divestment to fulfil merger regulatory conditions – was it a competitive process?

A quant technology provider, SigTech, has analysed data on the global hedge fund industry and identified key trends around growth, new launches and investment strategies. According to their findings and couting 27,255 active hedge funds globally, 67% of all hedge funds globally and 70% of all new fund launches are US-based Crypto hedge funds appear for the first time in the top 10 of hedge fund strategies

USA accounts for 67% of the world’s hedge funds, followed by the UK which has 8.6%. When it comes to the cities that have the largest concentration of hedge funds, unsurprisingly New York is the clear leader with nearly 7,000 funds (25.0% of total), followed by London with over 2,000 (8.2%), and Hong Kong with nearly 1,000 (3.6%).

In 1991 Moody’s presented itself in full-page advertisements as the first German credit rating agency. Moody’s Investors Service now achieves an average operating margin of over 60% worldwide. However, after three decades, the German-language website of this leading international agency is still in a deplorable state. After so many years, Moody’s German website still does not live up to its claim to be the “first German credit rating agency”.

It is due to the special history of the Federal Republic of Germany after the Second World War that, in contrast to France and other neighboring countries, in Germany, practically everyone had to learn English in such a way that every German could obtain information from sources in English language. A large number of American soldiers were stationed around the financial center of Frankfurt am Main until the 1990s. The British used to be numerous in other parts of Germany. In the financial sector in particular, the English language became so established that today it is even the internal working language in some banks.

Against this background, it is more than understandable if hardly anyone at the US credit rating agency thinks about what is on the German website. Anyone who can afford a credit rating from Moody’s Investors Service is sure to speak English. The most important functions of this credit rating are in the international financial markets anyway, so that this service is closely linked to the world markets. The language of the world’s financial markets has remained English to this day.

Even if the professionals get information from English-language sources, it does matter what the German-language website of a leading rating agency looks like. This can be emphasized in particular because search engines such as Google are now structured in a user-oriented manner and take into account the language in which the browser is set or which language the user of a browser prefers. Therefore search results are also found on Moody’s German website, so that the searcher gets a corresponding impression of the website and the quality of the services of the rating agency “Moody’s Investors Service”.

The carelessness with which Moody’s Investors Service website is maintained is unworthy of a leading rating agency. The business of a rating agency is to provide reliable information to the financial markets. Like hardly any other company, every letter counts for a rating agency. The assessment results are expressed in letter codes. If a letter is missing, this can make a significant difference in the meaning of the judgment for the financial markets.

The credit rating scale is an ordinal scale, the distances of which are not to be interpreted uniformly as in the case of an interval scale. The “risk distances” can vary between one level and the other. On the credit rating scale, every letter counts. Each rating symbol on the scale has its own definition that is important to read and understand.

Therefore, if the spelling is sloppy, it shakes readers’ confidence. Do they mean A or B or maybe even C? Double A or triple A? The wrong letter can cost issuers a lot of money, just as investors can lose a lot of money by relying on the wrong letter code. Even if the databases ensure that the ratings are displayed correctly, it shakes confidence in the rating agency’s performance when a remarkable number of errors are made in Moody’s official German website.

It is believed that around 130 million people worldwide speak German as their mother tongue. German is the most widely spoken mother language in the European Union. In addition, German is the official language in four countries: Germany, Austria, Belgium and Luxembourg. German is also an official language in Switzerland and Liechtenstein. There are also German-speaking minorities in more than 40 countries around the world.

A strange gender indifference

This important position of the German language is contradicted if, after calling up moodys.de, you first read about Africa and contacts for Africa:

To be politically correct nowadays it is important how to address people. “Moody’s chooses to challenge the status quo and continuously champions gender equality through our insights, workplace programs and community partnerships. Diversity makes us stronger and we all benefit when we move forward together.” Moody’s writes that and even has a video ready. Article 21 (non-discrimination) of the Charter of Fundamental Rights of the European Union prohibits discrimination based on sexual orientation.

Therefore, it must unsettle the reader when what appears to be male employees are given female job titles. This is particularly annoying when dealing with external contacts. Should the person be addressed as a man or as a woman? Or even as diverse? Interested parties of the rating agency are embarrassed to possibly address a man as a woman or, conversely, a woman as a man. On Moody’s German website, a female position designation is assigned to the photo of a man. A person with a male name is represented as the female holder of the position. This is evident in all of the following four examples:

Only four examples are mentioned above. It would go beyond the scope of this blog post at this point to list all other cases of doubt and errors to be found on moodys.de. In any case, the examples show the lack of respect for the distinction in the German language between male and female position titles and their holders.

Because the attribution of female titles to male names, female names to male titles, and portraits of men to female positions and portraits of women to male positions is so inconsistent, the viewer cannot readily identify in which cases errors are involved or the seemingly female person actually wants to be addressed as a man and vice versa.

“Moody’s continued inclusion in Bloomberg’s Gender-Equality Index is a strong testament to our ongoing work to support women in the workplace,” said DK Bartley, Chief Diversity Officer at Moody’s, when Moody’s announced that it has been included in the Bloomberg Gender-Equality Index (GEI) for the third year in a row. “As we look ahead, our actions will continue to be guided by our values – namely to foster an environment at Moody’s where all employees can thrive.”

Moody’s was recognized for ongoing leadership in promoting gender equality among its peer companies in the global business community. On the German website, however, there is no indication that the genders would be taken into account – at least if you look at the examples above.

A not very German website

For every new customer of a rating agency, it is of particular importance to learn the principles according to which he has to calculate the costs and prices of the agency’s services. Anyone who can expect high credit rating fees should be able to clarify in advance the principles according to which these fees are calculated.

There is also a button on Moody’s German website that can be used to access further information. Since it is in German, the user should assume that he will also receive information in German here. But this is not the case. Instead, a PDF file opens in English with very vague and general explanations:

For customers from German-speaking countries, it is particularly important to know the exact regulatory conditions under which credit ratings are created in Europe. This is especially true when it comes to an international rating agency that has to meet the requirements of different legal systems at the same time. But these documents, where every word counts, are only available in English. Here, too, only an English document is hidden behind the German-language link:

The German reader has to expect surprises everywhere. Links lead to pages in English, which the reader can expect to find in German. But that’s not all, because there are more special features. The reader has to work his way through a gibberish of German and English in some places:

However, the reader must also be happy to find any documents at all. So every German reader will certainly prefer to download an English text than none at all, e.g. in this case – anyone who wants to obtain binding information about the products from Moody’s Investors Service and therefore clicks on the link for products ends up nowhere, depending on which page you are looking for this information from (website accessed on February 26, 2022):

Warning about Moody’s numbers

Most Germans probably already take for granted the mistakes they find in texts that have been translated from English into German. This also applies to the translations of texts from this international rating agency. Nevertheless, the indication that the translations are wrong must be permitted here in our repair shop.

For example, quintillions appear instead of trillions. The German word for trillion is “Billion”. The German translation for “one billion” (one thousand millions) is “eine Milliarde”.

The error is not to the detriment of the rating agency, because the German reader now believes that the rating agency is 1000 times larger (see https://de.ratings.moodys.io/). But the fact of the matter is that Moody’s has only rated one-thousandth of what it says here in German language.

Probably everyone knows the mistakes with the comma, because in English a comma is put where in German a period is made. So Moody’s doesn’t speak of one and a half analysts, but of fifteen hundred. While the error here is funny, the comma should be properly placed when it comes to money.

Overall, however, the errors show that Moody’s German website is obviously not intended to be a maintained and up to date source of information. Therefore the website could simply be switched off. This could be the safer way for the US rating agency to avoid intervention by the European Securities and Markets Authority. Due to the EU regulation on rating agencies, the following Moody’s agencies would potentially be examined if the supervisory authority were to develop general doubts about the correctness of the publication practice:

• Moody’s Investors Service Cyprus Ltd
• Moody’s France S.A.S.
• Moody’s Deutschland GmbH
• Moody’s Italia S.r.l.
• Moody’s Investors Service España S.A.
• Moody’s Investors Service (Nordics) AB 

Translation problems

While some of the errors above just bring a smile and can be corrected with a few clicks, greater difficulties lie in the accurate translation from English to German. Strictly speaking, this begins with the term credit rating, because Moody’s translates “credit rating” with the word “Kreditrating”, which contains the word “Kredit”. “Kreditgeschäft” is defined by the German Banking Act in § 1 KWG.

When people in Africa spoke of an independent credit rating agency – independent of the three leading US rating giants – they were talking about “Global Credit Rating” from South Africa, which had made a name for itself on the entire African continent. GCR is a leading credit rating agency in Africa with offices across the continent including South Africa, Nigeria, Senegal, Kenya and Mauritius. That time is now over: Moody’s Corporation announced today that it has agreed to acquire a controlling interest (51%) in Global Credit Rating Company Limited (GCR).

“GCR’s ratings play a significant role in the growth of Africa’s financial markets by providing critical insights into credit across a range of economies and sectors,” said Rob Fauber, President & Chief Executive Officer of Moody’s. “By combining GCR’s successful domestic operations with Moody’s global expertise, we have a unique opportunity to expand Moody’s presence in a high-growth region.”

Rating agencies have been the subject of a number of controversies since the late 1990s, writes Norbert Gaillard in his latest book “Les agences de notation“, published in Éditions La Decouverte, Paris 2022. The Asian crisis of 1997/98, the Enron scandal of 2001 , the debacle on the subprime market in 2007/2008 and the sovereign debt storm of 2010-2011 have impressively demonstrated the influence of the credit rating agencies on the financial markets. At the same time, however, the difficulties and limitations of the system also became apparent, as the author shows in his book.

• A first point of criticism has long been the lack of transparency in the methods used to prepare the assessments that are so important for the financial markets. The author therefore examines the question of how the solvency of states, companies and other organizations as well as banks is assessed. Do the agencies base this on mathematical-statistical models?
• A second point of criticism is directed at the strong concentration in the rating industry, because there are only three agencies that dominate the market. The author therefore investigates the influence this concentration of power can have on the credit ratings awarded.
• The author sees a third point of criticism in the way in which the credit rating agencies generate income, namely mainly from fee payments by issuers, which could therefore influence the independence and neutrality of the judgments.
• Norbert Gaillard identifies a fourth area of ​​criticism in the historical failures in various crises that the rating agencies have experienced in the course of their more than hundred-year history. In essence, this is about the damage that resulted from the fact that some imminent insolvencies were not recognized in good time.
• The author investigates a fifth point of criticism, which consists in the accusation that the rating agencies would overreact, i.e. convert news too quickly into upgrades or, in particular, downgrades.

The book is divided into five chapters. The first chapter provides an understanding of the rating industry and the emergence of the oligopolistic structure in this market. The second chapter is dedicated to definitions, interpretations, typologies and modalities of assigning ratings. These representations of the author are of lasting value, since he meticulously processes the history of the rating agencies. Two other main chapters deal with the assessment of public and private issuers. Finally, the fifth chapter deals explicitly with the strengths and weaknesses of the rating agencies, with their conflicts of interest, their reputation, the regulations as well as the influences on rating changes.

Conclusions

From his diligent survey of facts, the author draws the wise conclusion that the situation of the rating agencies is paradoxical in three ways. Historical experiences with the rating systems have tarnished the reputation of the rating agencies. Nevertheless, the credit ratings continue to be used by investors and also by supervisory authorities. This kind of immunity of rating agencies has boosted their earnings (and hence their market caps). Even if the agencies have lost some of their influence, they remain more indispensable today than ever before – of all times, at a time when private and public debt is exploding.

Norbert Gaillard therefore calls for a central debate on the analysis of credit risks. He laments the lethargy of politicians, supervisors and institutional investors who are neglecting the “dizzying debt boom” (Norbert Gaillard). He appeals to the rating agencies not to let themselves be taken over by the debt euphoria, but to show market participants the limits of debt growth.

The excessive regulation of rating agencies in the European Union (EU) has failed to achieve its goal.

The dominance of US rating agencies remains. Their ratings are practically the only decisive factor for the allocation of the economic resource “capital” in Europe. The three leading US agencies S&P Global Ratings Europe, Moody’s Investors Service and Fitch Ratings now account for 92.19% of turnover – and that even after “Brexit”, although the US agencies in the Anglo-Saxon region have natural advantages and these turnover shares are no longer included in new calculations.

The market share of these three agencies, S&P Global Ratings Europe, Moody’s Investors Service and Fitch Ratings, is, for example, 87.02% after 2012 and 91.07% in the last year 2019, now 92.19% in 2020. Politicians in Europe once thought they could use the opportunity of the global financial crisis to put the US agencies in their place.

It should also be noted in these figures that a number of credit rating agencies took steps to ensure the continuity of their rating activities before the UK’s exit from the EU was completed on December 31, 2020. Rating agencies, which – like the US market leaders – have a significant presence in the UK, have taken different approaches to restructuring their businesses. These changes impacted rating agencies’ applicable trunover from EU credit rating activities in 2020 and are reflected in the changes in rating agencies’ market shares in this year’s market share report.

Against this background, the changes in market share at S&P Global Ratings Europe and Moody’s Investors Service, but also at DBRS Ratings, can be seen in particular. With the new allocation, S&P Global Ratings Europe increases its market share in 2020 to 51.77% (from 40.40% in 2019), while Moody’s Investor Service keeps more sales in the United Kingdom (market share in the EU in 2020 only 30.12% after 33.12% in 2019). DBRS Ratings (1.11% 2020 after 2.99% 2019) as well as AM Best Europe-Rating Services (market share 2020 only 0.41% after 0.95% in 2019) lose market shares. All agencies that have given up market share have in common that they have their parent companies on the American continent and their main focus of activity in the most important European financial center, London, which was affected by Brexit.

Against the background of the effects mentioned, the increase in the market shares of the rating agencies remaining in the EU moves in the cosmetic area. CERVED Rating Agency (increase to 1.18% 2020 after 0.84% ​​2019), Scope Ratings (increase to 1.00% 2020 after 0.62% 2019) and CreditReform Rating (increase to 0.84% ​​after 0.53%). From the calculation mechanics of the market share calculation it follows that the other agencies can also show market share gains, although the dominance of the US agencies has not been broken.

The table published today by the European Securities and Markets Authority (ESMA) contains a list of all CRAs registered in the EU under the CRA regulation. For each rating agency, ESMA provides the applicable total market share. Finally, ESMA provides an indicator of whether a rating agency has an overall market share of less than 10%.

KBRA, a full-service global rating agency committed to innovation and integrity, announced today it has entered a deal with leading growth-oriented private equity firm Parthenon Capital Partners who will acquire a majority stake in the company.

KBRA is a global credit rating agency found­­ed in the wake of the global financial crisis. “When KBRA was founded,” says KBRA CEO, President, and Co-Founder Jim Nadler, “our mission was to provide the market with timely, valuable, and transparent ratings and research. Over the past 11 years, KBRA has set the standard for engagement with investors, which has led to our leadership position across many markets. This investor engagement and outreach has also led to KBRA’s acceptance and reliance among issuers, policymakers, and key opinion leaders. As we continue to expand both domestically and abroad, we are excited to partner with Parthenon to accelerate our future growth.”

There are more rating agencies around the world fighting to break even than those that, like the leading agencies Moody’s and S&P Global, can offer top returns. In order to consolidate the rating industry, there is speculation as to how credit rating agencies could be merged or taken over in order to oppose the two leading agencies with another competitor with a global presence.

KBRA counts more than 400 employees across its five offices in the U.S. and Europe. The company has issued over 51,000 ratings with nearly $3 trillion in rated issuance since its inception in 2010. KBRA provides ratings and research across all sectors from its Corporate, Financial, and Government (CFG) and Structured Finance units. The company also delivers high-quality data, information, and tools to the market through innovative technology across its KBRA Analytics platform, including corporate and financial sector credit information and data and analytics.

“KBRA has quickly become a leading voice among the major global rating agencies. The market clearly relies on KBRA for holistic, transparent and thoughtful credit ratings and research” said Zach Sadek, a partner at Parthenon Capital.

“KBRA’s strong culture valuing integrity, ratings quality and customer service positions the firm for continued growth and success” said Brian Golson, Co-CEO of Parthenon Capital. “We look forward to partnering with KBRA’s passionate team to support their next chapter.”

Parthenon Capital’s financial advisor was Newbold Partners LLC and its legal advisor was Kirkland & Ellis LLP. KBRA received legal advice from Gunderson Dettmer LLP and Shearman & Sterling LLP.

Moody’s Corporation posted an updated management presentation for investors on its website, ir.moodys.com, reflecting certain information regarding the Moody’s results for the three months ended September 30, 2021, as well as updated full-year 2021 guidance as of October 28, 2021, and its posting is provided pursuant to Regulation FD. Senior management is expected use this updated presentation during meetings with analysts and investors.

According to the new presentation, Moody’s no longer sees itself as just a credit rating agency, as it was once split off from Dun & Bradstreet. Moody’s sees itself equally as a provider of financial intelligence and analytical tools supporting our customers’ growth, efficiency and risk management objectives and therefore as a global integrated risk assessment firm providing credit rating opinions, analytical solutions and insights that empower organizations to make better, faster decisions.

With Adjusted Operating Margin for Moody’s Investors Service of 61.5%, the rating agency is still the main cash cow, while Moody’s Analytics operates with a margin of 29.7%. Moody’s complete investor presentation can be downloaded here.

Nearly one in three (30%) pension funds and institutional investors say their use of ESG rating agencies will increase dramatically over the next three years, and a further 38% believe it will increase slightly. This is according to new research from quant technologies provider SigTech, who surveyed institutional investors across North America, Europe and Asia that collectively have around $935 billion of assets under management (please see the attached press release).

However, the findings reveal that 66% of professional investors interviewed said they struggle with ESG rating agencies because they can provide wildly divergent ESG scores at a company level.

Over the next three years, 14% of institutional investors surveyed by SigTech said they expect investor activism to increase dramatically, and a further 52% anticipate a slight rise.

Moody’s Corporation has acquired Bogard AB, a leading provider of data and information on politically exposed persons (PEPs) in the Nordic region. The acquisition advances Moody’s ability to help customers perform Know Your Customer (KYC) screening and research to address financial crime.

Bogard covers over 17,000 PEPs, relatives, and close associates across Sweden, Norway, Denmark, and Finland. The company collects, refines, and updates its data using various sources, including tax authorities, business and real estate registries, and other directories in the Nordic region.

The EU’s Fourth Money Laundering Directive entails an extension of the PEP concept, which now also covers domestic PEPs. This means that more resources are used for the activities affected by the law and that the importance of an efficient KYC process increases. With the help of Bogard’s practical experience of AML, Bogard has developed services that help customers in the Nordic market to easily and smoothly meet the requirements for PEP identification.

“Access to accurate, up-to-date information on politically exposed persons is vital for banks, corporations, and other market participants seeking to prevent money laundering and other forms of corruption,” said Keith Berry, General Manager of Moody’s KYC business unit. “Bogard’s sophisticated technology and local expertise further expands Moody’s integrated risk assessment capabilities to address financial crime, and deepens our presence in the region.”

“The EU requirements for providers of credit ratings have not broken the dominance of the three big agencies S&P, Moody’s and Fitch”, says a story published in Germany’s only stock exchange daily, Börsen-Zeitung. in Frankfurt on October 28, 2021. The author, Detlef Fechtner, reports on a speech deliverd by Steffen Kern, Chief Economist and Head of Risk Analysis at the EU’s financial market regulatory and supervisory authority ESMA, in Paris (France).

According to his presentation, the EU requirements for providers of credit ratings have not broken the dominance of the three big agencies S&P Global Ratings, Moody’s Investors Service and Fitch Ratings. “Hardly anything has changed in the past five years,” reported Steffen Kern on the occasion of the symposium of the Center for Financial Studies and the Institute for Banking and Financial History in cooperation with Moody’s. As Kern emphasized, “a more even distribution of market shares would be desirable”.

Kern recalled that the market share of the Big 3 – the two heavyweights S&P and Moody’s as well as number 3 Fitch by far – was 92% six years ago and is now 91%. The figures show that the many small rating agencies fail to put competitive pressure on the trio – despite regulatory support. The EU regulation from 2013 stipulates that issuers who have at least two ratings created should “consider” commissioning a small agency.

His findings show that there are apparently no market forces that would cause the leading agencies to be replaced. The often invoked “failure” of these rating agencies during the financial crisis did not lastingly break the trust in their judgments.

S&P Global reported third quarter 2021 results with revenue of more than $ 2 billion, an increase of 13% compared to the same period last year.

• Every segment was delivering revenue growth.
• Net income increased 75% to $797 million.
• Diluted earnings per share increased 75% to $3.30 primarily due to the debt tender premium and fees associated with the senior notes tender offer in the prior period.
• Adjusted net income increased 24% to $855 million.
• Adjusted diluted earnings per share increased 24% to $3.54 primarily due to very strong revenue growth.
• The largest adjustments in the third quarter of 2021 were for costs related to the pending merger with IHS Markit and deal-related amortization related to previous acquisitions.

“The strong global economic growth, elevated M&A activity, strong stock markets, and increased volatility realized in the third quarter created a solid underpinning for our businesses. In this environment, S&P Global delivered an exceptional quarter of financial results as we continue to provide our customers with the essential intelligence they need to navigate rapidly changing markets,” said Douglas L. Peterson, President and Chief Executive Officer of S&P Global. “After delivering very strong results in a difficult 2020, we expect to meaningfully surpass those results in 2021.”

S&P Global continues to make progress on the merger with IHS Markit as the regulatory path to closing is becoming clearer:

• The UK and European regulators have now announced their views on the transaction.
• S&P Global and IHS Markit have committed to divest S&P Global’s CUSIP Global Services and Leveraged Commentary and Data, together with a related family of leveraged loan indices, as well as IHS Markit’s Oil Price Information Services (OPIS), Coal, Metals & Mining (CMM), PetroChem Wire, and Base Chemicals businesses.
• Based on the regulatory feedback and these divestitures, the management now anticipates closing during the first quarter of 2022.

The Company’s operating profit margin increased 80 basis points to 51.9% due to higher incremental profits on additional revenue partially offset by merger-related costs. Adjusted operating profit margin increased 250 basis points to 55.4% primarily due to higher incremental profits on additional revenue.

During the third quarter, the Company returned $186 million to shareholders in dividends. There were no share repurchases during the quarter due to the pending merger with IHS Markit.

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