YOU JUST DON'T UNDERSTAND. That's what companies sometimes say to the people who rate their bonds. But the folks at the National Association of Insurance Commissioners, who rate private-placement debt, are really under fire. This debt is purchased, usually by an insurer, directly from the issuer rather than in the open market.

The snag is that the NAIC--unlike big-time debt raters such as Moody's--hasn't been using industry specialists for its ratings (which run from NAIC-1 at the top, down to NAIC-6). The NAIC method: Ratings analysts divvy up the companies alphabetically, rather than by industry.

So HCI USA Distribution squawked that the analyst handling companies beginning with the letter "H" had made a bad call when it got a NAIC-3 rating for its $30 million private placement. A lot is at stake: The higher the rating, the lower the company's interest tab. HCI, the U.S. subsidiary of Holland Chemical, later got upgraded to NAIC-2.

The NAIC says it is remedying this by moving to an industry-based system--and doubling the size of its rating staff, to 23. Says spokesman Ed Barks: "This is an evolutionary process." The staff may get a breather. The spiraling private-placement volume is off lately, thanks to higher rates.

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