Credit Rating Agencies the heart of global financial systems Part.III

In the United States is the SEC that accredits the rating agencies can note issuers, a special status, the NRSRO. It is now held by the five main rating agencies that represent 98% of the U.S. market. The two challengers were able to obtain this status, a prelude to any attempt to internationalize, in 2003 for the Canadian DBRS (Dominion Bond Rating Services) and 2005 to the American AM Best, which specializes in rating companies insurance.


This demand for self-regulation has led rating agencies to overhaul their practices in methodology and ethics. Indeed, quantitative approaches too opaque and often resulted in "very good" ratings of financial players to hidden risks, or having issued bonds such as "structured finance" in spite of the risks associated with the nature of these products.

So in March 2007, it revised its rating methodology for banks by reducing the inclusion of state support or supervisory authorities in order to avoid masking the credit risk inherent in each bank. In June of that year, S & P revised its criteria for assessing securitization vehicles financing leveraged to take into account the loan contracts with very lightweight protection clauses.
On June 25, 2007, the French Banking Commission released the list of ECAI distinguishes seven actors: the Bank of France, Coface, DBRS, Fitch Ratings, Moody's, S & P and Japan Credit Agency. This status enables credit institutions to use the notations of ECAIs mentioned above for France to determine regulatory capital requirements arising from Basel 2 regulations.

The market for credit ratings is changing in light of internal innovations, new regulations and fears of investors. This cache of new players those focus on different goals in the field.

Credit Rating Agencies the heart of global financial systems Part.II

The market for credit ratings in recent years is subject to much criticism. Indeed, it is the issuers that pay the agencies questioning the independence of these. How to be neutral given that the issuer needs only a single note? It will tend to compensate the agency assigning the highest rating. The multiple criteria analysis are, for obvious reasons of confidentiality, never disclosed which increases the opacity a little more of the rating process that can be conditioned on the purchase of related services commonly known as "notching."

By focusing on the area of credit institutions, that summarizes the scoring of key players reveals a strong tendency to align the ratings (all these establishments are located in the first five layers). This convergence makes difficult the choice of investors who may consider not having to provide a rating scale commensurate with the risks involved.

The three leaders in the market for credit ratings are today: Standard and Poor's, Moody's and Fitch Ratings. This virtual monopoly is that international organizations and regulators, the market is fragmented and anticompetitive. In addition, there may be twenty years since the ouster of the firms of smaller sizes, mainly through mergers and acquisitions process which may eventually become a disincentive to impartiality and innovation.


The existence of a thriving market and strongly oligopolistic have IOSCO to react on the limits of the rating agencies through the publication of a code of Conduct "IOSCO CRA Code". CESR has meanwhile called for a self-supervised after which the rating agencies have indicated their willingness to collaborate.

In January 2006, the European Commission considered the establishment of a regulatory framework to oversee the activities of rating agencies superfluous, and therefore formally requested in May 2006 at CESR to produce an annual report on the consideration by rating agencies the principles set out by IOSCO (quality and integrity of the rating process, independence and avoidance of conflicts of interest, transparency and relevance of the ratings, confidentiality of information).

Credit Rating Agencies the heart of global financial systems Part.I

The key player in financial markets over the last twenty years, the CRAs (Credit Rating Agencies) best known under the name of credit rating agencies have become indispensable in providing a double service: an evaluation of the financial solvency of debt issuers (states, local governments, financial institutions, insurance companies, businesses) and participating in the decision support by assessing the financial risk of bonds. These services, summarized in a note, reflect on their own assessment of an agency and its analysts and may result in the case of a "downgrade" or "upgrade" significant repercussions on the costs loan, refinancing or the share price of a company.


Appeared in the United States, the financial rating has grown exponentially due to the internationalization of the markets. The notation is a service agency charged by the issuer and allows investors to compare the financial situation of both sectors to facilitate access to foreign markets and to rapidly assess the overall financial situation of a company. This note is an indicator of default risk, which complements the analysis from audit firms and analysts for investment banks. It allows the emitting structure to negotiate its interest rates for financing bank or bond issues.


Despite common customers and investors, the rating system is not uniform between each agency, even if harmonization has often been stressed. Each agency therefore has its own rating system that distinguishes mainly long-term debt and short-term, and divided into several layers that distinguish investment grade (High Grade) to speculative grade (speculative grade) addressed the latter mainly to investors seeking a high level of performance.

The Private Equity Market Growth

This dynamic cache, however, concerns related to the evolution of the activity. One of the first consequences of market development of private equity buyout is the generalization of so-called secondary, tertiary and even quaternary view, consisting of leveraged acquisitions of companies already owned by one or more other funds. In 2006, the third type of LBO acquisitions was made through this resale between funds. This type of assembly raises serious concerns particularly related to the high level of debt in these successive operations, which raised fears of a bubble bursting. Indeed, the succession of holding recovery strengthens the total weight of debt in financing the acquisition. But a classic LBO average 70% funded by debt. We can now understand the anxieties expressed about the level of debt when several successive LBOs are made on the same entity.

On the other hand, in a context of rising interest rates, the sector should experience difficulties, but still far from an economic downturn. Indeed, this market should continue to grow in the coming years, particularly in France where many companies are to sell, LBO funds have gained credibility recognized, will no doubt key players in the market.

Finally, the IPO of a country, who is stated objective to identify a permanent source of capital and diversify the sources of fundraising, shows that the mutation is now facing the sector. The number of mega deals (i.e. acquisitions exceeding the one billion Euros) is more important, the private equity funds have no choice but to raise more funds. This requires, of course, on the one hand by increasing the resources collected from traditional capital providers. But also, for the sake of being less dependent on suppliers of capital and at the same time less sensitive to changes (particularly increased) interest rates on financial markets, the alternative "fund raising" on the stock market seems obvious. The money, usually so discrete and whose activity is based on the original financing of non hand, may now be found in the coast!

The Private Equity Market

Private Equity market has been experiencing four to five years an unprecedented dynamism. The figures for 2006 speak for themselves:

* 71% growth in business volume in 2006
* 71 billion of funds raised in 2006 or 22% over 2005
* 208 LBOs carried out in France in 2006, with two thirds of companies less than 100M € turnover,
* 1.5 million people now work for a company in France came under LBO, 9 to 10% of private sector employees,

The trend of 2007 is equally positive, as evidenced by recent events in the industry.


Private equity is one of the five main areas of activity of the market says private equity (intervention in the capital of unlisted companies generally to achieve horizon 3-10 years of strong capital gains), other activities are:

* Seed capital (or seed money) which represents the first stage since it is for investment projects still in its infancy, funded in order to develop a technology still in R & D to enable to go forward to a potential market,
* Venture Capital, also known as the Venture Capital (VC), which translates into a capital in innovative companies, being in the early stages of development and which have a high growth potential but also a very high risk,
* Capital reversal of investing in troubled companies to put in place a recovery plan.

The Private Equity, also known financing LBO (Leverage Buy-Out) groups for its funding and leveraged acquisitions of target companies, usually mature companies with strong growth potential. LBO funds - often associated with managers of the target - develop installation and operation of acquisition of the company with the objective to remain the capital of the latter ideally between 5 and 10 years while significantly improving the result of the business recovery. The solutions for output or funds are then variables: initial public offering; taken over by another fund, an industrial sale...