Upholding our Independence and Integrity in Credit Ratings
Morningstar Credit Ratings and DBRS respond to recent Wall Street Journal article
August 7, 2019
You may have seen today's The Wall Street Journal article about credit ratings agencies, and we wanted to share some context about the way in which Morningstar Credit Ratings and DBRS conduct their research and ratings.
As we shared with the article’s reporters, with whom we have been engaged in interviews and responses to inquiries for the last several months, we disagree with its conclusions as well as the primary data set used for its analysis. Morningstar has a more than three-decades-long track record of calling it like we see it and assigning ratings in the investing landscape that hold up over the long-term. Both Morningstar Credit Ratings and DBRS take great pride in—and great pains to protect—the independence and integrity of our credit ratings, which flow from the rigorous and consistent application of our methodologies and analytics, not from competitive pressures.
In our conversations with these reporters on this topic, we shared the following:
- Our commitment to independence, transparency, and a long-term approach is not lip service; it comes from our mission of empowering investor success. We could never be successful if we’d be willing to waver on our methodologies, because issuers will no longer seek ratings that investors won’t accept.
- We are students of the markets and have observed that competition is generally good. New entrants in established industries tend to bring about innovation and lower costs, and those are good things. In the credit ratings industry specifically, we believe Morningstar Credit Ratings and DBRS have been successful as newer entrants in the U.S. and Europe due to a desire for a wider diversity of opinions from the market and greater transparency.
- We believe the analysis conducted for the article does not create a full picture of the credit ratings landscape nor adequately provides the context to understand that the analysis is limited in scope. A major portion of the data used for its analysis has an inherent bias toward the three largest NRSROs, and we alerted them to this bias within days of learning about it.
- The data used in the article does not and cannot account for the frequency with which smaller NRSROs are engaged by an issuer but ultimately not chosen to rate the deal, because it is anticipated the smaller NRSRO would have a more conservative opinion of the transaction. While the larger NRSROs will typically still be engaged even if their rating is more conservative, smaller NRSROs usually will not. For example, since January 2017, DBRS was initially requested to but not selected to rate 24 U.S. RMBS transactions, and since August 2017, Morningstar Credit Ratings was initially requested to but not selected to rate 261 U.S. CMBS transactions.
- The data set analyzed by The Wall Street Journal also fails to take into account that NRSROs have differing methodologies and weights for various analytical factors. Furthermore, it does not account for changes to ratings after debt is issued; does not account for updates to methodologies that can lead to ratings changes; and looks at average difference where NRSROs disagree rather than a median difference, which would be a more accurate measure to show just how different ratings might be.
- We stand by our credit opinions, corresponding methodologies, and how we approach our business. The article specifically cites instances in which Morningstar Credit Ratings or DBRS provided ratings that are higher than those assigned by other agencies. Even well-informed investors can agree to disagree based on different methodologies. We focus on ensuring our methodologies and analytics are robust, applied consistently, and reflective of our latest thinking about the asset class. As is the case for all deals we rate, we published detailed analysis to explain our opinions on our websites.