“Kroll contends Moody’s deliberately lowballed its rating – a move that could have ripple effects through the market for National Penn’s bonds – to scare other small banks into hiring it for future deals…
…“It seems this was nothing less than intimidation,” said Kroll President Jim Nadler. “Investors and issuers are worried that Moody’s, if it’s not paid their ransom, will continue doing this until they bully their way into the market.””, Timothy W. Martin, “Moody’s, Kroll Quarrel Over Bank Rating”, Wall Street Journal
“I think Kroll is 100% correct, because that’s exactly how Moody’s operated in the private MBS and ABS markets before the financial crisis. Bad guys. It’s amazing that our federal government and financial regulators have allowed their oligopolistic and not-that-competent practices to continue and be so important to our system of finance.”, Mike Perry, former Chairman and CEO, IndyMac Bank
Moody’s, Kroll Quarrel Over Bank Rating
Kroll Says Moody’s Lowballed Its Rating to Scare Other Banks
Jules Kroll formed Kroll Bond Ratings four years ago. Bloomberg News
By Timothy W. Martin
Moody’s Corp. doesn’t often give away its thoughts free of charge.
But the ratings firm made an exception recently, issuing an unsolicited credit rating to National Penn Bancshares Inc., a small community bank it had never assessed before.
Moody’s grade was lower than one issued just weeks earlier by Kroll Bond Rating Agency Inc., which the bank had hired to rate a new bond.
Kroll contends Moody’s deliberately lowballed its rating—a move that could have ripple effects through the market for National Penn’s bonds—to scare other small banks into hiring it for future deals.
“It seems this was nothing less than intimidation,” said Kroll President Jim Nadler. “Investors and issuers are worried that Moody’s, if it’s not paid their ransom, will continue doing this until they bully their way into the market.”
A Moody’s spokesman said the firm’s unsolicited rating for National Penn was due to the relatively large size of the debt deal for a regional bank. “We thought our opinion would be helpful to market participants,” he said.
Such a heated dispute is rare in the ratings industry—which has long been dominated by Moody’s, Standard & Poor’s Ratings Services and Fitch Ratings. But it follows moves by legislators and regulators to open the business up to more competition. Kroll is one firm to emerge from those efforts and has carved out a niche rating smaller banks like National Penn.
The dispute is about more than pride. Ratings have broad consequences for borrowers—which are often forced to pay higher interest rates as their ratings decline—and for creditors, many of whom can only buy bonds with ratings above a certain level. If one or more ratings firms issue a lower rating, they may be forced to sell.
The most recent fracas centers around $125 million in debt sold in September by National Penn, of Allentown, Pa.
National Penn paid Kroll to evaluate the deal, and the firm gave the bonds an “A-minus” rating, a grade high enough that the widest swath of investors, including big buyers like insurers and pension funds, could buy in. The deal attracted dozens of investors, and the bank on Sept. 16 sold $25 million more in senior notes than executives had originally planned to offer, said Mike Hughes, National Penn’s chief financial officer.
Moody’s entered the fray with its rating six weeks after the bond deal closed. In contrast to Kroll, Moody’s took a more negative view, assigning a rating two notches beneath Kroll’s. The lower rating meant National Penn fell from the safest tier of debt to the second-highest level, according to the National Association of Insurance Commissioners, which assesses the credit quality of securities owned by state-regulated insurers.
Mr. Hughes said the bank was “surprised” that Moody’s offered the unsolicited rating but declined to comment on the potential impact with investors.
“We looked at National Penn like any other bank rating with one exception—they did not participate in the ratings process,” said Allen Tischler, a senior vice president on Moody’s U.S. banking team. The rating took four to six weeks to piece together, he added.
Moody’s never met with National Penn senior management. Instead, Moody’s analysts sifted through public disclosures, listened to earnings calls and read news articles, Mr. Tischler said. These types of situations, with no participation from the rated issuer, are “definitely the minority,” he added.
Moody’s hadn’t rated a U.S. bank with assets under $10 billion all year. In its eight-paragraph rating rationale from Oct. 31, Moody’s said National Penn’s “acquisition appetite” for troubled banks “poses risks for creditors,” calling into question the management’s strategy. Few detailed financials were mentioned in the initial Moody’s rating.
Scott Fainor, National Penn’s chief executive, stands by his company’s acquisition strategy. “This is a disciplined management team,” Mr. Fainor said.
Debt issuers pay to get their deals rated by firms like Moody’s, Kroll or S&P. Critics of the issuer-pays model say firms could relax their standards to win business, as was alleged after the financial crisis.
But in the case of smaller or emerging corners of the debt markets, such as community-banking debt, Moody’s, S&P and Fitch—which collectively account for about 95% of the ratings universe—still wield strong influence with investors and issuers.
Indeed, Moody’s late involvement could further dissuade community banks, which are already hesitant to get rated and issue debt, said John Boulware, a managing director at Community Capital Advisors, which advises small banks on their finances. “It’s probably just another piece of information that would lead community banks to not want to play in the space,” Mr. Boulware said.
Kroll was started by corporate investigator Jules Kroll four years ago amid calls from regulators and legislators for more competition in the industry.
Amid a historic year in debt issuance by financial companies, Kroll has been the solo firm rating 16 community-bank deals this year.
That includes National Penn, a community bank with 127 locations in Pennsylvania, New Jersey and Maryland.
Kroll’s rating of National Penn spanned 11 pages. “What investors want from rating agencies is less emphasis on the rating and more emphasis on research,” Mr. Nadler said. “Apparently Moody’s isn’t getting the same message.”
This week, Moody’s issued a follow-up “credit opinion” on National Penn, covering three pages and fleshing out many of the firm’s original arguments. Its bond evaluation is investment grade.