Capital Markets

Moody’s to Identify Non-Participants

The agency moves to single out unsolicited ratings.
Stephen TaubAugust 13, 2004

Moody’s Investors Service is seeking comment on a proposal to identify rated issuers that do not take part in the rating process.

Officials at the credit-rating agency said they plan to start the new practice later in the year. Moody’s stressed that a large majority of its rated issuers participate in the rating process, and therefore few of its ratings would be affected by the policy change.

“In general, Moody’s and rated issuers agree that the ratings process benefits from issuer participation, as it allows them to provide their perspective and relevant information concerning their creditworthiness,” said Christopher Mahoney, chairman of Moody’s Credit Policy Committee. “However, some issuers choose not to participate for various reasons, and we would be prepared to identify such non-participants.”

Moody’s said that all issuers are provided the opportunity to participate in the rating process.

In the past, critics have charged Moody’s of issuing artificially low, unsolicited ratings in private transactions. “The rationale is that this forces issuers to pay for Moody’s services in the hopes of getting a better rating,” said Steven Schwarcz, professor of Law at Duke University, in a November 2002 letter to the Securities and Exchange Commission. “To the extent such misbehavior has actually occurred, targeted remedies, such as requiring disclosure of the fact that a rating is unsolicited, would appear appropriate.”

The Moody’s proposal reflects the market’s desire for greater transparency, said Mahoney. “While [Moody’s wishes] to be responsive to market demand for more transparency around our ratings, we believe that all of our published ratings meet Moody’s standards for accuracy and quality, irrespective of the issuer’s participation in the rating process,” he asserted.

As a result, added Mahoney, the company does not believe that the proposal represents a rating modifier or reflects a rating action. According to Mahoney, it is “simply an indication that a designated rating was assigned without our having had analytic communication with the issuer.”

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