If, for example, a municipality stops paying a rating fee, the credit company may remove its ratings on previous bonds, which could raise questions in investors' minds and make it harder for the municipality to sell new bonds.
One investment banker in the Southwest said he encountered such a situation. Several years ago, he began representing a cash-strapped school district. Things had gotten so bad, the district raised the price of school meals.
To save money, the banker suggested that the district drop one of its two credit ratings. That would save less than $10,000, but would be better than cutting textbooks. Moody's fee was lower, so the banker decided to drop S&P. That is, until he heard from S&P. The credit rater gave him an option: Pay $5,000 for S&P's service, or it would pull all of its ratings.
The investment banker said he had no choice: He decided to pay for both ratings, which the school district continues to do. "We're just paying off Standard & Poor's, and we're costing taxpayers an additional $5,000, because we're concerned that the negative association of their pulling the rating would cost more than $5,000," he said. He spoke on the condition of anonymity, declining to identify the school district for fear of angering the credit raters.
Vickie A. Tillman, S&P's executive vice president, said, "We reserve the right to withdraw our opinion" when the firm does not have enough information to reach a conclusion, and S&P would never "compromise its objectivity and reputation" by withdrawing it for any other reason.
Unsolicited Opinions
Some U.S. lawmakers have raised another area of concern: The credit raters have a privilege but little responsibility under a government rule that gives them access to confidential information from a company being rated.
The rating companies say they need such inside data. But when they miss financial meltdowns such as Enron Corp., WorldCom Inc. and the Italian dairy company Parmalat Finanziaria SpA, the raters argue that despite having had insider access in many cases, they can't be blamed for investor losses because they can't detect fraud. "The job of insuring the accuracy of those source materials belongs to auditors and regulators," said Frances G. Laserson, a Moody's spokeswoman.
Rating companies sometimes give yet another perspective about inside information. When rating a company without its cooperation, the credit raters occasionally say they don't need non-public information. They call such ratings "unsolicited"; others in the industry call it a hostile rating.
Moody's estimates that less than 1 percent of its ratings are unsolicited. Tillman said S&P rarely does unsolicited ratings, and generally only if a company borrows more than $50 million, explaining that the credit rater considers it a public service to rate major offerings. James Jockle, a Fitch spokesman, said that more than 95 percent of the companies it rates "agreed to pay our fees."
However, corporate officials, investment bankers and others familiar with the rating firms' strategies say there's a reason unsolicited ratings don't appear common: Companies approached that way by credit raters usually agree to pay a fee rather than risk a weak rating made without their cooperation.
An S&P executive, who spoke on the condition of anonymity because the firm hadn't authorized her to comment, said that S&P maintains a sales force -- what it calls an "origination team" -- whose goal is to improve revenue by finding companies to rate and charge a fee. "Some of it is cold calling," she said.
Northern Trust Corp., the big Chicago -based bank, said in a recent letter to the SEC that it "has been sent bills by rating agencies for ratings that were not requested by Northern, and for which Northern had not previously agreed to pay." In his letter, James I. Kaplan, then the bank's associate general counsel, continued, "On occasion, we have paid such invoices in order to preserve goodwill with the rating agency, but we feel that this practice is prone to abuse." Northern Trust declined to elaborate.
