To increase the transparency of ratings practices, Moody's Investors Service has proposed identifying issuers that do not participate in the ratings process -- assuming the idea gets support from market participants.
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Under its proposal, Moody's would reveal whether ratings were first assigned without the issuer's participation, note if the issuer had suspended participation in the rating process, and also note if the issuer has not participated in the process during the past 12 months.
Currently, the agency identifies in the initial rating announcement if the rating was unsolicited and if the issuer did not participate in the rating process.
The agency would begin citing of disclosure in new reports by the end of the year, starting with global corporate and sovereign issuers, and possibly extending to large U.S. municipal issuers in the future.
Moody's said the number of credits affected would be small as most issuers participate in the ratings process. No list has yet been compiled for municipal issuers, though it would probably include more frequent issuers, and those with a lot of outstanding debt, said Jerome Fons, managing director of credit policy at Moody's.
"It's about whether or not we have a substantive analytic interaction with the issuer, though there's no evidence whether that would make any difference in the quality of the rating," Fons said. "We hope the information is reliable. We're not auditors."
Driving this proposal are the demands of the investor community in Europe and regulators such as the Securities and Exchange Commission and the International Organization of Securities Commissioners, Moody's said.
Ratings processes have been increasingly criticized since agencies failed to warn investors of corporate debacles, such as Enron, Parmalat and WorldCom. In the municipal market, Orange County in California was rated AA by Moody's and Aa by Standard & Poor's until the day after it filed for bankruptcy in 1994. At the time, ratings agencies said county officials gave misleading information about the financial condition of their multibillion-dollar investment pool.
Rebecca Hill, vice president at Standard & Poor's, said the agency already discloses issuers in the insurance and financial services sectors that do not participate in the ratings process. The agency undertook that disclosure initiative about 14 years ago when prompted by market participants for greater transparency in those sectors. However, the practice hasn't been adopted in the public finance industry, though the agency may consider it if there is sufficient market interest and public information in conducting a rating, Hill said. Less than 1% of the agency's ratings are unsolicited, she added.
Fitch Ratings does not currently disclose those issuers that are not participating in the ratings process, Nancy Stroker, group managing director at the agency said. The agency generally indicates if a rating is initiated by Fitch without the request of the issuer. Just last week, Fitch announced it withdrew its rating from ACA Financial Guaranty Corp. at the insurance company's request shortly after a downgrade in May.
Stroker said that the agency does not disclose issuers that are not participating in the ratings process because the process is "not as black and white as it may seem."
"There are many shades of gray," she noted.
Stroker said that some issuers give adequate information, others are more selective, while others give vast amounts. Stroker noted that Fitch would disclose such issuers if a regulatory body demanded they do so, or if the market requested it.
The SEC has no regulatory oversight over rating agencies, though it has wrestled with the possibility for over a decade. Last June, the commission released a broad concept release seeking public comment on regulatory oversight of the rating agencies.
SEC official Annette Nazareth has suggested the SEC stop designating rating agencies as nationally recognized statistical rating organizations, whose ratings issuers use to meet federal and tax-exempt money market funds requirements. Unless the SEC ramps up its oversight of rating agencies, Nazareth said the SEC should give up the NRSRO designation.
The Senate Banking Committee plans to hold a hearing on credit rating agencies next month. The exact date is to be announced shortly.
Susanne Walker contributed to this article
