The Canadian arm of Standard & Poor's Ratings Services has merged with Canadian Bond Ratings Service, giving the combined agency dominance in the country.
The deal has been in the works for the about four months and came about largely because CBRS was moving into a more global spectrum, while S&P wanted to expand its presence in Canada. The combined company will take on the S&P name, and have a total staff of 47 people, 25 of them analysts.
"We had been expanding and expanding, and a lot of Canadian companies had been seeking funds in the U.S. and in foreign countries, and the investors in a lot of this debt were no longer residents of Canada," said Brian Neysmith, president of CBRS, who takes on the role of managing director under S&P.
"What we found was a lot of our business was starting to go global, and one of the major rationales for the merger was the fact that now, between combining their operations here and our operations, we now have a critical mass to completely serve every single facet in the Canadian market and serve any Canadian borrower and any investor who's interested in Canadian debt almost any place in the world."
The deal would put the ratings of Canada's bonds on a global standard, so investors and issuers around the world would know the quality of a Canadian bond just by looking at its rating. "It's going to harmonize more of the standards on a worldwide basis," Neysmith said.
The merger will create the largest rating agency in Canada. "This is really S&P saying, We're really committed to the Canadian market and to growing the Canadian market,'" Neysmith said. "They think it's going to add a lot of depth to the Canadian market and improve secondary trading because between their ratings and our ratings, we effectively cover the entire spectrum."
However, market participants are not all that concerned that the combination of the two companies will result in a lack of competition. In fact, many were expecting CBRS to be acquired by another company.
"There's still Moody's [Investors Service], us and DBRS. And of course we expect Fitch, now in its new strengthened form, to make a decent attack on the Canadian market, so the Canadian market will have four very good competitors," Neysmith said.
"We're certainly not going to change the way we do things." said Greg Nelson, senior vice president of structured finance at Dominion Bond Ratings Service (DBRS). "From our perspective, that focuses other people's attention on the fact that there really is only two or three credible sources, and that still is the case. I thought that given their historic relation with Duff & Phelps, and given the acquisitive nature that Fitch has been, that maybe they would have tried to take them out."
A representative from Fitch did not return phone calls by press time.
Canadian bankers cited that pressure of the U.S. agencies has played a major factor in the deal as well. "When you decide it's time to get out, you may as well get out for value. And if you get out for value, the obvious buyer is a U.S. agency," said David Allen, managing director, head of Canadian securitization group at CIBC World Markets. "So the fact that this happened is not all that surprising to me."
Allen also pointed out that there could be some benefit in the merger in the asset-backed commercial paper sector of the market, as only DBRS is required to submit a rating for Canadian ABCP paper.
CBRS only rates four of the 30 ABCP conduits in the country. "I suspect S&P may try to use that platform to establish a presence in the short end of our market, and if that's the case, I'll be interested in hearing what they have to say about that as things unfold," Allen said.