The surprise merger between Fitch IBCA and Duff & Phelps Credit Rating Co. - such a surprise that a senior structured finance pro at one of the firms confessed to being "shocked" - was welcomed by many in the securitization market.
While structured finance is a only one part of the whole merger - though an important part - asset backed analysts and market players suggested that with the merged firm being able to compete more effectively with Moody's Investors Service and Standard & Poor's there will be an increase in competition, despite there being one less agency.
"This is one of the few markets where a smaller number of companies may lead to more competition. The new firm should be able to put a lot of pressure on Moody's and S&P, especially in the securitization business," said Alexander Batchvarov, head of international ABS research for Merrill Lynch. "And it will probably kick in quickly because the new firm would have a substantial global reach."
The merger - perhaps more accurately described as an agreed takeover by Fitch - sees Fitch's parent, a diversified French services company called Fimalac, offering $100 a share in cash for DCR, valuing the company at $528 million.
"I think it's a good thing for the industry because it means that S&P and Moody's will now have a serious competitor," said one U.S.-based banker, who works on structuring Latin American asset backeds. "It's not going to happen overnight but it will make a difference in the long-run."
One Latin ABS pro at DCR in New York, while weighing up whether to be worried about his job or pleased that the DCR stock he holds has been valued at a premium, also saw the logic in a deal. "The merger makes sense because we fight over the same deals and a combined company will be more profitable and more effective as a competitor against S&P and Moody's," he said.
The big question - at least for people who work at both agencies - is where do the two firms overlap and where do they complement each other. Both have an emphasis on structured finance, with some suggesting that DCR brings in around half of its revenues from that sector.
DCR is certainly stronger in Latin America, while Fitch, thanks to IBCA's roots in Europe, has stronger coverage of European banks, and, to an extent, the securitizations that those banks are increasingly turning to. Fitch has also made a bigger impact in Australia, Japan and many countries in Asia.
The area where there is the biggest overlap is in the U.S. ABS market.
Fitch's chairman, Robin Monro-Davies, acknowledged that there would be some rationalization, but said that it would "not be dramatic".
Even if the merged firm will have excellent geographical reach, it will still be much smaller than S&P and Moody's, with a total staff of around 1,100, compared to the big twos approximately 1,500 each (though that difference may be less significant for structured finance on its own).
It will also have to fight against restrictions in the U.S. that mean that many public investors can only buy deals with ratings from the big two. "Investors know that S&P and Moody's are the 800-pound gorillas," said a New York banker.
Yet one more unknown is what the new firm will be called. Presumably "Fuff" and "Dibca" are unlikely to be used.