Investors Speak Out on Ratings Transparency


Reinstating trust in the ratings process is key to growing investor interest, according to buyside participants in a panel at an asset-backed securities conference in Miami last week.

“Ratings won’t go away,” said John Kerschner, head of securitized products at Janus Capital. “We need ratings to help frame the calculus for a bond quickly. But does it mean you want to trade on the information? Not really.”

Kerschner added that nothing has really changed with ratings since the crisis. “It’s alarming because of the conflict of interest that continues to exists,” he said.

As an example he spoke on the problems created by Standard Poor’s withdrawal from the Goldman Sachs/Citigroup CMBS deal earlier this year.

This event, Kerschner said, was a big problem that lost some people money. “SP should have done more damage control,” he added. “You have this process that we trusted and it is broken.”

Another problem that must improve before investors can trust the deal rating process is that many new issues in the market continue to rely on a single rating agency. It is a big red flag that keeps investors away, he said.

“As an investor it’s helpful to have more than one rating agency on the deal especially when it comes to more esoteric asset classes,” Kerschner said.

Providing a defense of the rating position was panelist Ted Burbage, head of U.S. structured finance investor relations at SP. While its business model had not shifted, Burbage explained that SP has done a lot of work on improving the process by clarifying definitions and ratings criteria.

“The CMBS situation was very specific and we never provided a rating on that deal,” said Burbage in reference to the Goldman/Citi deal. “It is unfortunate and we don’t want that to happen again but the bottom line is that we don’t want to put a rating out that will have to be downgraded straight away.”

Fellow panelist Uri Ron, senior vice president at PIMCO, reiterated a much talked-about sentiment at this year’s conference: investors cannot over rely on ratings and should these as just another data point.

“It’s important to remember that securitized products are only a small part of the investment universe; there are people who could just ignore it completely,” Kerschner said. “The level of distrust in securitization products is very high and the burden is on us as an industry to get people outside this room comfortable with what we are doing.”

Daily Briefing | Thursday, October 27, 2011

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