ARC Ratings Seeking to Exploit Credit Grading Credibility Loss

Ratings companies from four continents said they created ARC Ratings SA, seeking to exploit the loss of credibility suffered by the three biggest firms during the financial crisis.

ARC will assign grades to sovereign debt, financial and non-financial companies and structured products, the backers said today. The company will use a modified ranking scale that distinguishes between different levels of risk without dividing credits between investment- and non-investment-grade, it said.

“Current methodologies are insufficient in capturing new information elements which will change the way risk is rated,” Uwe Bott, the company’s chief ratings officer, said in a statement. “Our approach adapts to a dynamically changing global environment, which requires constant re-invention of credit assessment.”

ARC will rate mid-sized companies, a group that’s starting to look toward capital markets for funding rather than to banks. Those issuers, which are the backbone of many economies, need to diversify their sources of finance and reduce their dependency on traditional lenders, ARC said.

The firm was formed out of Companhia Portuguesa de Rating SA and other shareholders are CARE Ratings from India, South Africa’s GCR, Malaysia’s MARC, and SR Rating Group from Brazil. The company intends to bring in more shareholders and each partner’s stake is capped at 25 percent, according to the release.

The three biggest ratings companies are Standard & Poor’s, a unit of McGraw Hill Financial Inc., Moody’s Investors Service, and Fitch Ratings. The top grades they assigned to financial products backed by sub-prime mortgages turned out to be mistaken when the U.S. housing market collapsed five years ago. That forced them to downgrade billions of dollars of bonds to junk and prompted accusations the grades had been awarded to win business from investment banks.

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