Hard Bargain

German Firms Revolt Against U.S. Rating Agency Fees

Standard Poors. Source Reuters
Established rating agencies get a red light from German corporations.
  • Why it matters

    Why it matters

    Rating agencies Standard & Poor’s and Moody’s dominate the market allowing them to dictate prices for ratings. In the last two year, several DAX-30 companies have cancelled contracts with the market leaders. Now others are also considering a switch.

  • Facts

    Facts

    • The revolt against Moody’s and S&P began when Deutsche Post, HeidelbergCement, K+S Group and Continental decided to leave the ratings companies rather than agree to price hikes.
    • The emergence of other ratings services threatens the long-established duopoly.
    • Financial officers relish the opportunity to launch a price war among the ratings services, which would force companies to cut more favorable deals or risk losing business.
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    Audio

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When Moody’s Investors Services and Standard and Poor’s Financial Services announced hefty price increases last fall, they provoked a revolt among German companies that threatens to embroil them in an open price war.

Hanover-based auto supplier Continental fired the first shot – taking an action never done before by a member of Germany’s DAX stock market index. It showed Moody’s the exit door over complaints its price was too high.

It was the first time New York-based Moody’s lost a contract with a DAX company, but not the last. Kassel-based fertilizer company K+S Group joined the budding rebellion by canceling its contract with Moody’s, saying the firm was just too expensive.

Now, the insurrection against the two American giants is spreading. Handelsblatt has learned the electric utility company Eon in Düsseldorf and the energy firm RWE in Essen also are considering a move. Both Moody’s and S&P face a growing chorus of loud complaints about what German companies describe as outrageous pricing policies.

The seeds of revolution were sown more than two years ago, when a group of German chief financial officers representing 12 large companies sent a letter to S&P complaining about a fee proposal from the ratings agency that would double the prices charged for the information it gathers. The financial officers were united in declaring the rate hike “completely unacceptable.”

S&P shrugged off the complaints with no major concessions and began collecting the higher fees in November 2012, even though Bonn-based Deutsche Post and HeidelbergCement decided to cancel their contracts.

Initially, Moody’s was not targeted, but the financial officers made clear that their unhappiness with high costs also extended to Moody’s. Both American companies were described as dictating their rates, not negotiating them.

Now, the insurrection against the two American giants is spreading.

Neither S&P nor Moody’s had a comment on the defections of the DAX companies.

Until recently, S&P and Moody’s could largely dictate their own terms because in the world of the DAX 30, they enjoyed something like an unchallenged dual monopoly.

The fear of paying higher risk premiums for bond issues was simply too great for chief financial officers to push back against rising fees.

They needed the stamp of approval from S&P and Moody’s to attract investors and were willing to pay for it, even if they were “choking back their anger,” according to one source. Thus, yearly fees for the average DAX company are in the middle-six figures.

Now more and more chief financial officers are questioning whether they need the ratings produced by the two top dogs. And with good reason: the risk premiums for bonds issued by Deutsche Post and HeidelbergCement stayed at a nearly constant level even after they left S&P.

Meanwhile, a growing number of financial officers are questioning whether they really need the ratings of both companies. They point to the software giant SAP, based in Walldorf near Heidelberg, which in 2010 issued a billion-euro bond completely without ratings.

Moody’s and S&P face additional challenges including the emergence of a smaller competitor, Chicago-based Fitch Ratings, which is emerging as a serious foe. “(Fitch) has established itself as an alternative to be taken seriously,” said Stefan Scholz, treasure of Continental.

Previously, Fitch was seen as respectable only among banks. Industry at large remained almost exclusively with Moody’s or S&P, which together still command a market share that dwarfs Fitch. But that was before the defections of Deutsche Post, Heidelberg Cement, Continental and K+S.

Three of the four firms are now using Fitch, which sources say has undercut the fees charged by the two larger companies by about 50 percent, though no one in the know will comment on the record.

But at Continental, which now uses Fitch, Mr. Scholz said, “Next to the quality (of the service), price was an important criteria for the choice of our (rating agency).”

With large companies breaking away from the two big agencies and aligning with Fitch, German companies are discovering they now have a lot more leverage in negotiations.

“With the tender procedure used by Continental, DAX companies finally have a way to deal with the price cartel established by Moody’s and S&P,” a source said.

“With three sellers, there is the possibility of playing them against each other.”

Indeed, unlike Deutsche Post, which announced its break from S&P with a press release widely regarded as a public snub of the ratings agency, Continental left quietly.

The door remains open for a return to Moody’s, while the company also puts pressure on S&P and Fitch to make better offers.

“We can well imagine using the same procedure when the current contract runs out,” Continental’s Mr. Scholz said. In other words, he looks forward to launching a price war among the rating agencies.

This article was translated by Anna Park Kim. Jeff Borden also contributed to this story. To contact the author: dohms@handelsblatt.com

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