The Market Opportunity
Credit Rating Industry
For over 80 years, Credit Rating Agencies (CRAs) have been an important part of the financial markets infrastructure. During the subprime mortgage crisis in 2007, the big 3 CRAs lost the market’s trust, as they were far too late in their reactions and noticeably inaccurate in their risk assessments. Nonetheless, they have still been able to retain their oligopoly and currently hold +95% on the EUR 5 Billion market.
The lack of competition in this industry leads to a highly profitable CRA business with EBIDTA margins north of 40%, at the expense of the issuers of securities who pay elevated prices for the rating services.
Meanwhile, motivated by regulatory demands and the prolonged period of low interest rates, the investment paradigm is changing towards riskier and higher-yielding products. Major issuers like banks, insurance companies and large corporations are increasingly moving into more complex, hybrid and structured securities.
Among them are the Contingent Convertible Bonds, known as CoCo Bonds. EU regulators strongly support this type of hybrid security as a tool to prevent future bailouts of banks with taxpayers’ money. The number and diversity of CoCo Bonds issued by banks is rapidly increasing and their value is expected to exceed EUR 200 Billion by 2019.
On the other side, Investors are still perceiving those hybrid instruments like a black box and are expressing the needs for for transparency in theirs associate risks. In that context, TheMarketsTrust has conducted a feasibility study to assess if there is a real business opportunity as well as in which form the new rating and valuation service should be distributed.
