Though some market players believe it is too early to say, the merger between Fitch IBCA and Duff & Phelps Credit Rating Co. is indeed adversely affecting asset-backed transactions by smaller, mid-size issuers.
"Fitch does not have the experience or the desire to focus on the smaller, mid-size issuers," said Warren Kornfeld, director of asset-backed securities at William Blair & Co. "Fitch really wants to focus on larger issuers."
Kornfeld said that several of his company's transactions have been caught in the fray. "There's really a need for a Duff equivalent," he stated.
A Duff rating is important for asset-backed issuers not only because investors look to ratings for credit decisions, but also because many of those who invest in transactions by smaller firms are insurance companies, which need a Duff rating for regulatory capital purposes.
The National Association of Insurance Commissioners (NAIC) has a rating matrix, consisting of six categories, that indicates the amount of capital an insurance company needs to hold to make a particular investment. One of the ways for an investment to fall into a favorable capital category is to get a rating from a nationally recognized rating agency such as Duff.
Kornfeld stated that with Duff gone,"Somebody else has to hopefully step up to the plate to provide that sort of service."
However, Kornfeld said that although it is more difficult to get deals done, its not a dead end either. For example, Standard and Poors Rating Service and Moody's Investors Service still rate some smaller transactions, though these rating agencies have a preference for insured transactions.
"That's why deals are moving to Asset Guaranty Insurance Co. and ACA Financial Corp.," Kornfeld said.
Another possibility is to look to other entities which are NAIC-designated and nationally recognized. Though these groups currently do not rate asset-backed deals Kornfeld said, "where they did rate an asset-backed transaction, that rating would be acceptable to the NAIC."
But despite these other avenues, Kornfield believes that the best alternative would still be to have a rating agency to assume Duff's role.
Meanwhile, another source said that he has heard of a company that is not sure whether an existing relationship it has with Duff could be moved over to Fitch, since it didn't have a corresponding relationship with the latter rating agency.
Despite the feeling of impending doom in some quarters, some sources think its too early to tell what the effects of the merger would be.
"I haven't heard of Fitch not being interested in looking at smaller asset-backed transactions," said Gregory Gac, managing director at Quadrant Financial Group, LLC.
He added that whenever there's less competition in a market segment, it's bad for the people who rely on that particular segment. "I don't know if it's actually going to happen here," Gac noted. "But I hope that it doesn't.
"My impression is all the issues that have to do with combining the two entities haven't yet been worked out."
