Friday, May 23, 2008

At Request of Bond Issuers or Bankers,Credit-Rating Firms Switch Analysts

The Wall Street Journal

Some college students shop around for the easiest professor. Wall Street investment banks and bond issuers have done the same thing with analysts at credit-rating firms.

Moody's Corp.'s Moody's Investors Service and Fimalac SA's Fitch Ratings acknowledge they have switched analysts assigned to rate bonds after receiving requests to do so from bond issuers or their bankers. Changes usually were made after a specific bond was rated, meaning the analyst wouldn't work on the bond issuer's next deal, according to current and former officials at the credit-rating firms.

While switching analysts appears to be infrequent, there are situations "where an analyst doesn't get the message that you're expected to be responsive," Bill May, a Moody's managing director, said in an interview. The reasons can range from failing to return a banker's phone call about a time-sensitive issue to missing deadlines.

The little-known practice could spur even more questions about whether bond issuers have too much influence over how their bonds are rated before being sold to investors. Critics claim that the longstanding practice of issuers paying for ratings gives them leverage that can undermine the independence of credit-rating firms.

Scrutiny of the industry has been growing ever since billions of dollars in mortgage-related securities that got investment grades as high as triple-A were downgraded sharply when housing prices tumbled last year.

Lawmakers and regulators are weighing new rules to beef up analyst independence, while rating firms are making various self-imposed reforms that include reviewing the work of analysts who leave for jobs at Wall Street firms or bond issuers.

In a sign of worry about how Moody's ran its ratings business, its shares are down 21% in the past two days, including a drop of $2.40, or 6.5%, to $34.51 in New York Stock Exchange composite trading at 4 p.m. Thursday. The company is investigating reports it tried to cover up a bug in its computer models that caused Moody's to overrate securities known as constant-proportion debt obligations, or CPDOs.

At Moody's, at least one analyst in the group that rated collateralized debt obligations, or CDOs, was moved off of a particular investment bank's deals within the past few years after bankers requested an analyst who raised fewer questions about their deals, according to people familiar with the matter.

Another mortgage analyst at Moody's was moved to the firm's surveillance unit after a Moody's official agreed with an investment banker's opinion that the analyst was too fussy, a person familiar with the situation said. The surveillance unit monitors the performance of deals that already have been rated, but doesn't rate new issues.

"Wall Street is not switching our analysts," a Moody's spokesman says. "Moody's makes decisions based on the best interest of the rating."

Voltron says: Translation: "Wall street is switching our analysts."

"We're a service business," says John Bonfiglio, group managing director of structured finance at Fitch. When faced with the decision of keeping an unpopular analyst or bringing in a new one, "we've done both," but not more than once or twice a year, he says.

McGraw-Hill Cos.' Standard & Poor's made sporadic analyst changes following complaints from bond issuers, according to a person familiar with the situation. An S&P spokesman said "the decision to change an analyst is always S&P's decision exclusively." S&P recently began rotating analysts periodically to "enhance our independence," he added.

When business was booming, Wall Street firms prized analysts who moved quickly, since investors were eager to pile into the mortgage market by buying bonds. Analysts who raised doubts about a deal could hurt revenues for the rating firm and investment bank. Rating firms say analyst rating recommendations only become final after being approved by a committee of senior officials.

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