A Low Grade For This Bond Grader

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.