Monday, 8 April 2019

Fitch Ratings Receives a (European) Record Fine for yet another Conflict of Interest

In this short post, we will review the news from a couple of weeks ago that Fitch Ratings, the third member of the Credit Rating Agency oligopoly, has been fined by the European Securities and Markets Authority (ESMA) for breaching its conflict of interest-related rules, specifically with regards to its ownership.

Fitch Ratings is the third member of the rating oligopoly and, like S&P is not a public company. Therefore, its ownership structure is a little more opaque and difficult to accurately determine. We know that the firm is owned by the influential Hearst Group, but only after the Group increased its stake in the agency at the expense of previous majority shareholder, French conglomerate Fimalac, in 2014. It is in relation to the ownership of Fimalac that this current regulatory action relates. Yet, whilst most CRA-related transgressive behaviour revolves around weighted bias – weighted in relation to the power dynamics within the rating industry and its connection to issuers and investors – this particular transgression was far more obvious.

ESMA had been investigating Fitch’s ratings of a French Supermarket group called Casino. The investigation has now concluded that, in relation to its ratings of the Casino Group from 2013 to 2015, the agency had failed to ‘meet the special care expected from a credit-rating agency as a professional firm in the financial service sector’. This was because between 2013 to 2015, one of the supermarket’s Board – Marc Ladreit de LacharriĆ©re – also owned a stake in Fimalac. As Fimalac was a majority owner of Fitch at the time, this conflict should have been declared; this is based on rules established in 2013 that states that nay shareholder with more than 10% in the agency must not sit on the board of a company the agency then rates. For not declaring and then removing the conflict, ESMA has fined Fitch Ratings a record fine of €5.1 million. According to the Financial Times, that fine covered three other breaches for similar violations.

What this episode does is bring into the limelight the potential for transgressive behaviour within the credit rating industry – it is not agency specific. In 2015 S&P was fined a record $1.5 billion, whilst Moody’s was fined $864 million. First time observers may think that this demonstrates this behaviour as only existing at the very top of the industry and, thus, creating a ‘duopoly’ instead of the oft-cited ‘oligopoly’. However, the truth is that Fitch provided documentary evidence detailing the transgressions of the other two instead of settling with CalPERS – the Californian pension fund that initiated the legal action against the Big Two – which tells us that they were not entirely guilt-free, but possessed the evidence needed to avoid being caught up with the Big Two. This current story tells us that it is the modern version of a ‘rating agency’ which is actually the transgressive vehicle, and not one particular agency. Fitch Ratings said, in response to the fine, that they are well aware of the European Regulations and acted in good faith. If this is true, then a record fine would not have followed. There are many transgressive industries within the financial sector, but the sheer consistency of transgressive behaviour from within the credit rating industry is remarkable, and shows no sign of abating.

Keywords – Credit rating, Financial Services, oligopoly, EU, @finregmatters

Tuesday, 2 April 2019

The Acuris Sale as an Indicator

In today’s short post we will look at the news recently that important players within the financial marketplace are jostling for position with regards to the sale of a company that specialises in providing particular information to the financial world. The emergence of NewsCorp and the so-called ‘Big Three’ credit rating agencies as potential purchasers of Acuris suggest that this is a potentially important sale. However, the question for this brief post is whether the sale acts as an indicator for a much larger, and much more important sentiment.

Acuris, formerly the Mergermarket Group, is a ‘media company’ that specialises in providing financial information to the marketplace. More specifically, it has been noted for its excellence in providing information on Mergers & Acquisitions (M&A) to its subscriber base. Although its current owners BC Partners only purchased the company in 2013 for £382 million including debt, it is now widely rumoured that the company is for sale. That proposed sale is drawing in some of the largest players in the sphere, with News Corp and the so-called ‘Big Three’ credit rating agencies supposedly circling the company which onlookers suggest could go for more than £1 billion. However, there have been a number of reasons put forward as to why there is so much interest in the company, with those reasons ranging from the reliable subscriber base that the company enjoys, to the company’s year-on-year growth. Yet, one element that may be the case is that the potential purchasers are of the strong belief that the post-Crisis financial landscape will settle more than it has. One of the reasons why this potential sale suggests that is a theory put forward by the popular press and a leading audit firm: a relaxed financial environment results in improved M&A markets.

Bonamie et al find that what they call ‘policy uncertainty’ does negatively affect M&A activity. Lee agrees but in respect of cross-border M&A activity, which is obviously a major factor in the M&A marketplace owing to the globalised nature of the market; the Financial Times reported at the end of last year that global M&A activity for 2018 had eclipsed a previous record set on the eve of the Financial Crisis. So, there is evidence to suggest that global M&A activity is increasing and that the trend may continue. How do we know the trend may continue? One clear indicator of that being the case is the feverish speculation surrounding the sale of Acuris and, particularly, who is interested in buying the company. News Corp, S&P, Moody’s, Fitch, and private equity firms like KKR do not invest on sentiment, and it is their business to foresee trends. The credit rating agencies in particular work tirelessly in building a vast network of information services to take advantage of future trends, a fact evidenced by Moody’s relatively recent purchase of Bureau Van Dijk. If we accept that these market-leading players foresee some increased level of stability within the marketplace, then the question becomes is the regulatory framework strong enough, post-Financial Crisis, to constrain such companies from taking advantage of their position that they are currently jostling for position for? Has the credit rating regulation been improved enough so that the inherent conflicts of interest that remain within their business model do not affect the M&A market negatively in relation to this potential sale? The answer remains to be seen, but given the deregulatory sentiment on offer in the U.S. and the potential for a regulatory race-to-the-bottom post-Brexit, we may already have the answer now.

Keywords – Acuris, Credit rating agencies, M&A, NewsCorp, Business