Competition For Credit Raters

Muni-bond issuers could have more agencies to choose from.
by | December 2006

Moody's. Standard & Poor's. Fitch. These aren't just the big names in municipal-bond ratings. They're the only names.

That may change under a law recently passed by the U.S. Congress. The Credit Rating Agency Reform Act intends to open the ratings business to new competition. It also is aimed at creating more transparency in a business that took some heat for missing financial scandals at companies such as Enron and governments such as San Diego.

The law makes it easier for firms to be designated a "nationally recognized statistical rating organization." That's a certification favored by institutional investors who buy municipal and corporate bonds. The law also gives the Securities and Exchange Commission oversight of the bond raters and requires the SEC to issue rules concerning conflict of interest.

Even with the new rules, however, it's unlikely that competing ratings firms will make huge inroads in the municipal market anytime soon. That's because the Big Three currently enjoy such a dominant position. "It seems to me three operations is plenty," says Frank Hoadley, capital finance director with the Wisconsin Department of Administration. "But I suppose there's always room for participation of smaller firms that would specialize in smaller sectors."