Morningstar Inc. is aiming to build out it diversified global credit-ratings coverage, including an influential voice in emerging esoteric and green-bond asset classes, through a $669 million purchase of rival DBRS.
Morningstar (Nasdaq:MORN) announced Wednesday it is purchasing DBRS, the world’s fourth-largest credit ratings agency, to combine with its own U.S.-based Morningstar Credit Ratings fixed-income research and ratings business. Toronto-based DBRS has been majority-owned by The Carlyle Group and Warburg Pincus since 2015.
The transaction, pending regulatory approval, will merge the privately held DBRS’ 43-year-old global operations that encompass ratings on 2,400 issuers and 50,000 securities with Morningstar’s smaller and more recently established national recognized statistical rating organization.
In a letter to shareholders on Wednesday, Morningstar Inc. Chief Executive Kunal Kapoor touted the potential for both agencies to team up on expanded coverage of esoteric asset classes and green bonds, as well as round out both firms’ existing coverage in commercial and residential mortgage-backed securities and financial institutional ratings in the U.S.
The purchase will grant Morningstar access to the European market, where the Canadian-based DBRS already has “regulatory approvals that are difficult to obtain, accelerating our existing plans for geographic expansion in the space,” Kapoor noted in his shareholder letter. “Replicating these competitive advantages on our own would have been costly and time consuming.”
A DBRS spokesperson declined comment.
Morningstar will finance the transaction with a mix of cash and debt, including the placement of a new credit facility when the deal is expected to close in the third quarter.
In his letter, Kapoor stated the deal provides “minimal overlap” in ratings coverage across most asset classes and markets. DBRS’ Euro-centric and Canadian market presence is outside of Morningstar’s coverage area, and the two compete in only a handful of U.S. ABS product lines: CMBS (both single asset/single-borrower and conduit deals), RMBS agency deals and non-qualified RMBS transactions.
Both agencies operate under the standard issuer-pay model utilized by major credit ratings which charges clients to rate securities offerings measured via established models and formulas. The agencies also market subscription-based monitoring and surveillance tools to structured-finance and other institutional investors.
In the letter, Kapoor pledged the combined entity would serve to increase transparency in the traditionally “opaque” fixed-income market involving private-based transactions, with increased use of technology such as blockchain for both new-issuance evaluation and ongoing surveillance of outstanding securitizations.
Morningstar launched its corporate ratings in 2009, and expanded into structured finance ratings and data research through the institutional investment research firm’s acquisition of ratings agency Realpoint in 2010.
Its buyout and rebranding of the Realpoint business as Morningstar Credit Ratings was an expansion into a niche provider of commercial and residential mortgage-backed securities, but in 2016 the company became a Securities and Exchange Commission-registered NRSRO covering corporate issuer and financial institutions ratings.
The move at that time created a sixth U.S.-based diversified credit ratings agency covering structured credit and asset-backed securities alongside DBRS, Moody’s Investors Service, S&P Global Ratings, Kroll Bond Rating Agency and Fitch Ratings.
DBRS, formerly Dominion Bond Rating Service, was formed in Canada in 1976. While it has a strong European and Canadian presence, the firm is also active in the U.S. with ratings on more than 1,100 corporate and public finance sector issuers (including autos, industrials, transportation, project finance, energy, consumers, banks, credit unions and insurance firms).
In addition to CMBS and RMBS transactions, DBRS’ structured finance coverage includes covered bonds, equipment, commercial mortgages, credit card and consumer lending, structured credit and finance, and student loans.
DBRS had $167 million in 2018 revenue, compared to Morningstar’s $36 million in revenue last year, or just 4% of Morningstar’s total revenue. Combined, the two agencies would have made up 17% of Morningstar's revenue.
