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Nov 22, 2010

Ratings agencies to get some competition

A new player is set to enter the credit ratings landscape

Meredith Whitney, a prominent banking analyst who became famous for her line of bearish reports on American banks is now in the running to open her own credit ratings agency, according to sources.

The Meredith Whitney Advisory Group said on Friday that the prospective firm intends to research and compete against the big name credit ratings agencies - Standard & Poor’s, Moody’s Investors Services and Fitch Ratings.

'It will be very difficult for any boutique to compete with the big three due to their lack of name recognition and recognized expertise,' says John Partigan, a partner in DC office of Nixon Peabody. 'A new entrant without a recognized brand is unlikely to be viewed as a viable alternative in the near team.'

However, the Financial Times reports that Whitney’s new agency is already set to use the existing business models similar to the top agencies, where issuers of debt pay for ratings - a model that has been strongly criticized since the start of the credit crisis. During the interview she mentioned that she would be able to manage potential conflicts of interest, 'if you run a good business and you have compliance in place, there should not be problems,' Whitney said.

In 2009, Whitney left her job as a banking analyst at Oppenheimer & Co, to launch her own equity analytics firm. Within two years it started swaying to the credit market side by writing bearish notes on municipal bonds, analysts said.

‘Whitney’s record is disappointing because of her lack of diversification and she focuses exclusively on financials,’ says Adam Wiederman an analyst for the website, Motley Fool. 'True, she’s an expert on banks, but stocks in the same industry often move in sync. This is especially true of the banking industry, in which new obstacles seem to arise every quarter.'

Previously, the big three-credit ratings agencies were under fire for failing to anticipate the global financial crisis and a lack of sophistication of their analytics. As a result, this attracted a series of new players to the market who can offer other solutions, says analysts. Despite this, Moody's, Standard & Poors and Fitch appear to welcome the competition but, many feel that new players like Whitney do not stand a chance of bumping them off their top status.

‘I think over the short term, the big three will continue to exist in their current form, but I think the sector’s going to change over the next 5 to 10 years,’ says Wiederman. ‘I think a company like Morningstar has a much stronger change of gaining share in the credit rating market.’

As for Whitney’s company it is in the process of applying to the SEC to obtain a license as a rating agency.

Aarti Maharaj

Aarti is deputy editor at Corporate Secretary magazine