Kroll Bond Rating Agency (KBRA) has issued a rebuttal to comments made by the Wall Street Journal in an article published on 7 October entitled "Investors Should Fear More Competition Among Ratings Companies."
The rating agency claims that there are a number of factual errors which it felt compelled to correct, KBRA also insisted that it hopes that no market participants have been misled by the Wall Street Journal article and welcomes further dialogue with investors.
The statement from KBRA read: "One does not have to go back too far in history to recall the fallout of less competition among rating agencies. Most notably, the author incorrectly states that in his defined time period (June through September) the three European CLOs rated by KBRA had the highest levels of debt relative to equity. This is false.
"A cursory review of the non-KBRA rated European CLO universe in this time period indicated at least six deals with higher leverage, and there may indeed be more.
"The author also suggests that KBRA requires lower enhancement on tranches for European CLOs, by highlighting three deals in a time period that saw dozens of CLOs rated and issued. Given variances in structures and portfolio composition, it is impossible to infer from such a small sample size whether the deals had higher or lower credit quality than other deals in the market. Further to this point, the KBRA-rated deals were for three of the largest, most-seasoned managers in the European CLO market, which is generally a credit positive. Another factual error in the article is in the lead-in chart, which is inaccurate and misleading. KBRA did not assign ratings on the AAA tranche of the three deals named in the article, nor were we asked for our feedback on enhancement levels for those AAA tranches. It is also unclear what data the author used to calculate the average enhancement for the most senior tranches on KBRA-rated deals."
KBRA's statement goes on to point out that the correct average subordination for the AAA tranches of the KBRA-rated European CLO transactions is 38.17% (not 34.83%, as reported), which is actually higher, not lower, enhancement than the reported subordination on AAA tranches of non-KBRA rated deals (37.71%).
In addition, KBRA has said it "challenges the premise of the article that competition should be feared, and strongly believes that delivering higher quality information to investors creates positive outcomes for the market.