Egan-Jones Ratings Company
|Providing ratings and research for enhanced investment results.|
Sean J. Egan, Managing Director
|Providing credit ratings and research for Institutional Investors.|
March 03, 1998
Mr. Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, NW Stop 6-9
Washington, D.C. 20549
Dear Mr. Katz:
The purpose of a ratings firm is to provide timely, accurate, credit quality assessments of various issuers. Unfortunately, the current industry participants do not always succeed at this task; the latest failing being the difficulty in identifying the problems in Asia. We believe there are two problems with the current situation: (i) lack of competition and (ii) conflicts of interest. Regarding the lack of competition, in the U.S. corporate market, S&P and Moody's have over 90% of the market. The current industry conditions tend to perpetuate themselves as in many cases, investment bankers are reluctant to recommend alternatives to issuers because of fear that future dealings with the two main ratings firms would become more difficult. Regarding the conflict of interest, we believe being compensated for ratings by issuers makes it difficult to point out that the "emperor has no clothes".
With regards to the proposal, we are concerned that the currently proposed requirements create insurmountable barriers to new competitors, especially those relating to size. A number of years ago AT&T could have argued that they were the only firm qualified to carry on the critical task of long distance service - only they had the size, staffing, experience and financial resources for this vital function. Had the FCC agreed with AT&T, the American people would not be enjoying the substantial drop in rates and improved service. Furthermore, as a result of the domestic competition, the U.S. firms are able to compete more effectively in the international markets, unlike many "protected" European and Asian competitors. Sadly, it is situations like Asia whereby the current rating agencies are least able to respond (for the previously-mentioned reasons) that cause the most disruption to the capital markets and ultimately cost a significant amount of money to investors and possibly taxpayers because of the delay in recognizing the problems.
Regarding whether an NRSRO should be required to make public its ratings, it is unlikely that a firm could make much headway against S&P and Moodys in well-established securities markets such as the US debt market (Fitch and Duff & Phelps have 5 to 7% of the market and they have been recognized for a number of years). Therefore, requiring that a firm make its ratings available at no charge to be recognized as an NRSRO creates an insurmountable barrier. Regarding using quantitative measures or models listed on page 8 of the rules proposal, we have found such measures do not have sufficient reliability. Egan-Jones is an internationally recognized rating firm for US corporate debt that is compensated by investors, not issuers, for its ratings.
Sean J. Egan