Morningstar said on Wednesday that it plans to purchase rival credit ratings agency DBRS for US$669m, its second such deal in less than a decade to expand its bond rating footprint.
The tie-up would meld two smaller credit ratings firms with a focus on rating asset-backed securities, a thriving market a decade after the financial crisis.
DBRS rated more than a 20% of all ABS issued from 2016 to the first half of last year, according to SEC data, while Morningstar rated 3.6% to 8.2% in that period.
More than 67% of all outstanding US home loans were held in securitizations at the end of 2017, versus 18% of auto loans, 12.5% of credit card debt and 12% of student loans, according to data from trade group Sifma.
While Moody’s, S&P and Fitch still dominate bond ratings with more than a 95% share of the total, smaller firm DBRS, KBRA and Morningstar have made inroads in rating bonds that bundle up consumer loans and mortgages since the financial crisis last decade.
BIGGER SHARE
The joint company plans to target a bigger share of the roughly US$8bn global credit ratings business, including in newer areas where fintech lenders and blockchain have been gaining momentum.
“Ratings activity hasn’t kept pace with the proliferation of new structured product categories, particularly in esoteric asset-backed securities, where we believe we can improve transparency,” Morningstar CEO Kunal Kapoor said in a letter outlining plans for the DBRS purchase.
Morningstar expects credit ratings to account for 17% of its total revenues after the DBRS deal closes, up from 4% without the acquisition.
The addition of DBRS, the No 4 bond rating agency by market share, would further expand Morningstar’s reach beyond equities research and data.
It first entered the bond ratings business in 2010 with its purchased Realpoint, a boutique CMBS ratings and analysis firm.
In addition to securitizations, Morningstar also has rated a couple dozen financial institutions and almost 300 corporate issuers, according to SEC data.
Morningstar plans to fund the DBRS purchase with a mix of cash and debt, including securing a credit facility after closing, which is slated for the third quarter of this year.
The acquisition will require regulatory approval, which could result in a more extended timeline.
Another potential hurdle is that the DBRS and Morningstar rely on different credit criteria to rate and monitor bonds, which totaled a combined 52,500 at the end of 2017, according to SEC data.
The two agencies will need to choose between models, or develop new ones entirely, to harmonize their ratings under a single platform.
“This is no small feat,” a senior staffer at a credit rating agency told IFR, noting that it is unclear if harmonization would result in downgrades or upgrades to existing credit ratings.
