“It’s hard to make a man understand something when his livelihood depends on him not understanding it” Upton Sinclair
How do ratings agencies make money? It may come as a surprise to some of you that ratings agencies get paid by companies to rate their debt and prospects. Which inevitably places ratings agencies in conflict between their desire to be retained to provide an assessment on one hand, and on the other the need to provide independent credible assessments to the market. But that’s how the business works, and the world’s biggest ratings agencies show no sign of withering away, despite the opprobrium heaped on them after failing to identify looming crises in American sub-prime mortgage lending and European bank debt.
The three main ratings agencies will be familiar to most of you – Standard and Poor’s, Moody’s and Fitch. A fourth ratings agency, Dominion Bond Rating Service (DBRS) might not be a household name but it seems to get disproportionate reference by the NTMA when pointing to how healthy our prospects are. DBRS recently produced an assessment of NAMA, covered here. Whilst it undoubtedly contained useful and factual information, for example the three year accounts analysis, its opinions on NAMA were eyebrow raising in their positivity.
DBRS said of NAMA that it has assembled a “talented team” with “deep experience” and with “the necessary skills to extract the best possible return from the loans and underlying property assets”. DBRS went on to say “NAMA has developed a robust and efficient infrastructure that allows NAMA the flexibility to develop individual responses to each debtor that bests maximizes the returns “
We find out today that although NAMA picks up some of the costs of the ratings agencies generally who rate NAMA’s bonds, that NAMA itself directly pays only one of the ratings agencies and guess which one? Yes, it’s DBRS! How much does NAMA pay them for their handsome compliments? Alas, that is confidential.
The information was revealed in the parliamentary question and response below:
Deputy Pearse Doherty: To ask the Minister for Finance if he will confirm the sums paid by the National Asset Management Agency to each of the ratings agencies Fitch, Moody’s, Standard and Poor’s and Dominion Bond Rating Service in each of 2010, 2011, 2012 and to date in 2013..
Minister for Finance, Michael Noonan: Rating agency costs relating to NAMA are, in the main, paid by the NTMA as part of its overall sovereign rating programme. NAMA directly bears the cost arising from the rating of NAMA Bonds by Dominion Bond Rating Service (DBRS). NAMA advises that the terms of its agreement with DBRS are commercially sensitive and of a confidential nature.
NAMA Wine Lake 
This is the normal method. The company usually pays for the rating of its own bond. (And I don’t think there is a real difference between NAMA or NTMA paying).
Not sure who else would pay for it.
In loans world, sometimes it is the manager who pays for the rating, as I manager of CLO, but this information is only to be used by the individual manager (in order to keep within its own covenants in their CLO structure).
Companies always pay for their ratings. Nothing new there. Of course there’s a conversation to be had about conflicts of interest but…
Red flag events are where companies stop paying for a rating. e.g. Quinn insurance well before things blew up.
Without these questions being asked by Pearse Doherty, I’m guessing the average Joe in the street wouldn’t be aware that NAMA paid for its own pat on the back.
Even then, is this story likely to be carried on RTE, the Irish Times, or the Indo? (It might in the Examiner)