Kroll Bond Ratings got one step closer to rating muni credits last week by announcing its first big public finance hire. The next step is to release a comprehensive default study to show the market it can be a serious rival to the three dominant rating agencies.
The new hire is Thomas Randazzo, a credit expert who was head of public finance at XL Capital Assurance for six years until 2008, and first vice president at Ambac Assurance from 1993 to 2002. More recently, he was president of the Municipal and Infrastructure Assurance Corp., the bond insurer set up three years ago by Macquarie Group and later sold as a shell company to Radian Asset Assurance.
He came aboard Kroll in late July as a managing director.
"We've hired the best people in structured finance, and it will be the same in munis, starting with Tom," said James Nadler, president and chief operating officer at Kroll.
Anecdotal evidence suggests most participants don't see major problems with how state and local government credits are currently rated, but Randazzo believes there are numerous transactions where Kroll could offer a unique perspective. He specifically points to infrastructure and project finance, including utilities, stadiums, public housing, and public-private partnerships.
"There is a need for further analysis on some of these," Randazzo said on Aug. 8. "That's going to be a growing part of the public finance market. … We'll go where the opportunities are."
Nadler added that opportunities exist not only in specific sectors, but by offering fresh perspectives and more detailed methodologies.
Detailed investigations and corporate intelligence are what made a name and fortune for Jules Kroll, who ran his own investigative and corporate security firm from 1972 to 2004.
In the wake of the financial crisis, he launched Kroll Bond Ratings with the aim of offering the same insights to a broader range of clients on corporate, structured, and municipal finance.
As with the incumbent rating agencies — Moody's Investors Service, Standard & Poor's, and Fitch Ratings — Kroll will operate on an issuer-pays model.
"It's time for somebody to come in, do some deeper research," Nadler said. "We're the first rating agency in this market to really go after munis since Fitch got in, in 1989."
The agency's first major step was to acquire designation as a nationally recognized statistical rating organization, which it attained 12 months ago by acquiring a firm that already had it, LACE Financial.
Nadler told The Bond Buyer in January that the agency was on track to rate its first public finance credit by summer, so the agency is a few months behind schedule in some respects. But the firm is serious about being a major contender and in mid-June rated its first asset-backed security: a $410 million issue supported by the Fashion Centre at Pentagon City, in Arlington, Va.
"We're not one of these small rating agencies that is trying to squawk as loud as we can just to get noticed," added Nadler, who has worked at Standard & Poor's and Fitch, "and we're not going to come in and scare the market on primetime news shows."
That subtle dig is likely aimed at Meredith Whitney, who claimed to have sought NRSRO status last November. Little on the subject has been heard since she appeared on "60 Minutes" last December to warn of big troubles ahead for state and local governments.
The next step for Kroll's public finance operations is to release a comprehensive study of defaults in the muni marketplace. The agency has been working on the study for several months and plans to release it early in the fourth quarter.
Nadler calls it a modern update to the 1971 George Hempel study, which evaluated the market in the Depression era from 1929 to 1937.
"It looks more extensive than I've ever seen before," Randazzo added. "There are a lot of observations and we'll try to make it as transparent as possible. That's what markets are looking for, transparency."
Randazzo said the study will allow users to "cut and slice" the data "by sector, by state, by year, by amounts — like assessed value on a per-capita basis."
Another area Kroll sees opportunity is in providing superior surveillance to the marketplace, so investors can have up-to-date information in a sector known for its late disclosure filings.
"That's as important to the market as the initial rating — making sure the rating is kept current every month, every quarter, or whenever you get the information," Nadler said, adding that the agency won't take on a job without figuring out what needs to be done from a surveillance standpoint.
"There is a real need for better, more accurate, ongoing surveillance," he added. "And the incumbent rating agencies, so far, haven't shown that they can do it."