For a rating agency whose analysts claim that a lack of market share is a competitive advantage, its growth would nearly prove counterintuitive. Dominion Bond Rating Service, the only private rating agency certified with NRSRO status in the U.S., is slowly brandishing its name on more and more deals within the asset-backed market, a development its top analysts say is due to quality service, relatively conservative ratings and transparency.
"DBRS does not have specific goals for market share - but we certainly don't aspire to rate 100% of the market," said DBRS Senior Vice President Quincy Tang. "But that is our competitive advantage," chimed in Vice President Bernard Maas.
That stance could be difficult in a market where heightened credit concerns almost demand an additional set of eyes for many transactions, but speculation that DBRS has routinely offered ratings for free was denied by Tang and Maas, who say that among the rating agency's needs is of course, to make money. DBRS currently charges roughly one-third of what its competitors charge for a rating; the rating agency plans to minimally raise its fees next year, however, and this year's rates are higher than they were in 2004, Maas said.
"Let me put it this way, I've never been told that our rates are too high," he quipped
Since setting up its first U.S. shop in Chicago with a handful of CMBS analysts in 2003, the rating agency opened a New York City office last March to gain a foothold in the rest of the U.S. structured-finance market. Since then, DBRS has rated some $150 billion worth of deals, primarily within the mortgage sector. The agency has, however, made a recent foray into the auto sector, bumping a Fitch Ratings rating off the $3 billion CARAT 2005-1 deal in June issued by GMAC, as well as Goldman Sachs' $1.3 billion GS Auto Loan Trust 2005-1, which went to market without a rating from Standard & Poor's. DBRS is also ramping up to rate its first structured finance deals out of Europe. The Canadian rating agency in September opened its first European office in London, and late last week announced its second office in Frankfurt.
But for all its strides, the rating agency's ratings still aren't viewed nearly as valuable as those of its competitors, investors say. Both buy- and sell-side sources within the ABS industry say they like and respect DBRS, but it's simply not yet big enough for its ratings to "mean much" - that is, hold much clout. "We do not place too much emphasis on their ratings. They are still very new and need to get recognition," said one buy-side source. Although, roughly 50 of its U.S. deals, mostly this year, listed only two other rating agencies, including the $9.3 billion AAA Trust 2005-2 Fannie Mae RMBS deal in May, and about 18 have included DBRS and just one other agency.
DBRS analysts say its size, and the fact that it does not have to answer to fee-hungry shareholders, allow it to be more discriminating of the deals that it chooses to rate than other rating agencies. For example, as the asset-backed securities market has become all but consumed with subprime RMBS paper, an increasing number of investors are becoming concerned that rewards are not commensurate with the risk, and that perhaps rating agencies are not being as strict as they should be, or will become strict in hindsight rather than foresight. DBRS, which is comprised in large part from big rating agency veterans, says they are not part of that camp.
"There are issuers we are less comfortable with than others, and in those instances we do not rate their transactions. I guess it is a little easier for us to say no' to certain transactions when we don't have to rate 100% of the market," Tang said. She said anything from structural considerations, say, to too little credit enhancement on a deal, to what the rating agency may view as a generally poor originator, could trigger DBRS to opt out of a rating.
Tang added DBRS is concerned with "issuers who may lack financial strength and may be subject to headline risk," saying that those companies will have a high hurdle to cross given the inevitable downturn in the credit cycle and spread widening in the market. "Investors should consider these risks carefully before committing to such investments," added Maas. One of the first deals the rating agency turned down, according to Tang - who heads up subprime MBS ratings for DBRS - was a pool of subprime second-lien loans with an average FICO of between 600 and 610 and WAC in the 12% to 15% range.
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