A Good Time and A Good Idea to Enter the Credit Rating Business Jules Kroll is planning to enter into the ratings industry. To determine whether it is a good idea and a good time for him to enter into the new business, we project the 5-year NPV for KBRA and apply SWOT analysis to KBRA. The 5-year projected NPV is $341.1 million, a positive number. It is a good time and a good idea for KBRA to enter the business. However, through our SWOT analysis, it would be difficult for KBRA to become competitive in a short time. Thus we suggest it add a credit rating division into the company to make attempts to it but not start up a totally independent credit rating company. The Strengths of Kroll Bond Rating Agency are that Jules Kroll has a plenty of related experience about corporate management and that Kroll’s former company was worldwide renown, even listed in the public capital market.
The Kroll corporate intelligence firm, which had shares listed on NASDAQ, and K2 Global Partners, which also performed intelligence and risk management work for clients, are evidences that Kroll may have adequate knowledge and experience about corporate management. The experience helps him extend into a credit rating business. With the strengths, the new company established could attract some people’s attention and gain users’ first trust for KBRA. Finally, those users might choose to purchase the agency’s service. Although Kroll has much experience about corporate management, the credit rating business is still a new business field for him. The Weaknesses of KBRA will be a lack of qualified staff, difficulties to get NRSRO status, substantial startup costs of KBRA business, and little interests from users and issuers of credit rating. According to Kroll, “If I can’t put the same kind of talent [of PhDs from MIT], I can’t compete”.
Finding and paying appropriate staff will be hard works. In addition, many users of ratings look only ratings issued by NRSROs, in which acquire a lot of time and money for a new rating agency to enter. Also, without revenues from users of ratings, it will be tougher to finance startup costs and future operating. Beside internal factors, we examine the external factors, Opportunities and Threats, of KBRA. The incumbent credit raters’ fail in the financial crisis gave an opportunity for new rating agencies like KBRA. After the financial crisis, the government and the investors realized the importance of appropriate corporate credit rating. The government might tend to subsidize newly-established rating organizations and create new regulations for credit rating in order to eliminate the oligopoly of three big financial agencies.
KBRA benefits from such environment. Also, it is easier for small or new rating agencies like KBRA to apply a new revenue model under revised regulations. After the financial crisis, many new rating agencies announced their entry into the credit rating business. Many of them were prominent to the public and owned a great quantity of resource. The entering of new firms made the credit rating industry competitive and thus posed a threat on KBRA. The Failures of Incumbent Credit Raters
The incumbent credit raters had received severe criticism following the collapse in creditworthiness and prices of mortgage-and asset-backed securities during the financial crisis in 2008 and 2009. The three large rating agencies were accused of facilitating a vast bubble in these securities by issuing overly optimistic ratings. Investors’ large and unanticipated losses in structured finance securities prompted widespread criticism of the three major credit rating agencies. Effect on Kroll’s Opportunities
The lack of credibility in the ratings agencies as a result of what happened in the mortgage crisis presented an opportunity for a new rating agency. This give Kroll greater opportunities to developing KBRA to a first-tier rating agency represented a large financial commitment, and entailed developing a new credit analysis organization staffed with experts, building new customer relations, and handling extensive regulatory requirements.
To determine KBRA’s NPV, we need to use some of the financial indicators of Moody’s Corporation (MOC) because they both in the same industry. For long term growth rate, we can’t use MCO’s average growth rate of revenue from crediting from 2000-2009 because the rates varied seriously. As a result, we assumed the revenue growth will be greater than 2.4%, the growth rate of MOC in 2009, because 2009 is a tough time for three big credit ratings company. However, at the same time, the number should not be too much greater than 2.4% to 5% as previous year of MOC since KBRA is just in a starting stage. So we assumed the number will be 3.2%. For discount rate, because KBRA and MOC are in the same industry, we assume they will have the same discount rate. Finally, we got KBRA’s NPV as $341.1 million. Enter the Credit Rating Business
If Kroll goes ahead with his plans, the following steps will be the best way to enter the ratings business. First, finding qualified stuff is a key success requirement. For the firm would have to compete with hedge fund and Wall Street firms for experts; Second, the interest from users is also important for building sustainable rating agency, they have to convince fixed ratings from the fixed income investors to ask for a Kroll rating; Third, the interest form issuers is also important. For many large rating agencies, issuers provided most of the revenue, thus, convincing bond issuers to use a KBRA rating would be necessary; Forth, the NRSROs status. For many users of ratings were obliged to look only at rating issued by NRSROs, so any serious entry into ratings would require NRSRO designation; Last, the investors, the costs for setting up KBRA rating business could be substantial, and the importance of investors can be seen from the financial projections of KBRA.