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When Interests Collide

Credit Raters Subject To Client Pressure

By Alec Klein
Washington Post Staff Writer
Monday, November 22, 2004; Page A09

When Allied Signal Inc., the big aerospace company, acquired rival Grimes Aerospace in 1997, it seemed like a simple thing. But then there was the question of how to deal with the rating companies.

Allied sought to pay off $125 million in Grimes debt, which was held in unrated bonds because Grimes was privately held. Investors were willing to sell their bonds to Allied to retire the debt, but they wanted the major rating companies to grade the securities to help set the right price.

About This Series

Unchecked Power: The world's three big credit-rating companies have come to dominate an important sector of global finance without formal oversight. The rating system has proved vulnerable to subjective judgment, manipulation and conflicts of interest, people inside and outside the industry say.
Moody's Close Connections
When Interests Collide
Graphic: The Rating Game

Shaping the Wealth of Nations: As more countries rely on the bond markets to raise capital, they have been forced to accommodate the three top rating firms. The credit raters often have more sway over foreign fiscal policy than the U.S. government.
Transcript: Post Writer Alec Klein
Smoothing Way for Debt Markets
Graphic: Moody's Expansion

Flexing Business Muscle: Lack of oversight has left the rating companies free to set their own rules and practices, which some corporations say has led to abuses. The credit raters have rated companies against their wishes and ratcheted up their fees without negotiation.
New Choices for Consumers
Graphic: Raters' Big Misses

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A rating likely would have raised the bonds' value, increasing Allied's cost to buy them. So an Allied official called one of the rating companies, warning it not to rate the debt, according to Edwin P. Dean, a bond analyst representing some of the investors. Dean said he got the story directly from the rating official whom Allied called. Allied said it "would be very unhappy if that agency rated Grimes," Dean recalled in an Aug. 17, 1998, letter to another rating firm he was considering hiring.

Dean, of the investment firm First Albany Cos., wrote that the rating company told him it feared losing the fees that it charged Allied, whose debt it already rated; as a result, it backed off from rating Grimes.

"That rating agency said candidly that Allied was a source of rating income and they would not jeopardize the relationship," he said in his letter, which The Washington Post obtained from another source. In a recent interview, Dean said he had approached Moody's Investors Service, Standard & Poor's and Fitch Ratings to get the bonds rated. "What the rating agencies were saying was, 'I'm not going to [tick] this guy [Allied] off,' " Dean recalled. They told him, "Allied was a good customer."

Dean said he holds no grudge against the rating companies. "Customers always have some leverage," he said.

The recipient of Dean's letter, Sean J. Egan, managing director of Egan-Jones Ratings Co., a small competitor of the three major credit raters, differs.

What happened with Allied "should be illegal," Egan said. By catering to Allied, he said, the credit-rating companies ignored the basic reason for their ratings: to serve the investing public. When the major raters declined to rate Grimes's debt, Dean hired Egan's firm to do a rating. Egan-Jones gave Grimes a "BBB+" rating, a solid grade.

Honeywell International Inc., which merged with Allied in 1999, declined to comment.

Vickie A. Tillman, S&P's executive vice president of credit market services, said in a written statement to The Post: "Standard & Poor's would never compromise its objectivity and reputation by choosing not to rate an entity out of deference to an issuer."

Fitch said in an e-mail, "Fitch goes to great efforts to assure that our receipt of fees from issuers does not affect our editorial independence."

Moody's declined to comment on Allied, but Raymond W. McDaniel Jr., Moody's president, said that in general, if a borrower does not furnish enough information about its debt, it can make it difficult for Moody's to rate it.

© 2004 The Washington Post Company