German ratings minnow takes aim at US whales
THE latest European challenge to the all-powerful US credit ratings agencies doesn’t come from the continent’s financial capital Frankfurt but Berlin, better known for raves than banking.
“We want to become the European voice on the ratings market,” says Torsten Hinrichs, chief executive of Scope Ratings.
From his office overlooking the huge Tiergarten park, Mr Hinrichs outlines grand ambitions of his own.
His firm is owned by wealthy, traditional German economic players, including the Schoeller family whose businesses stretch from an eponymous bank to textile to oilfield equipment, and Stefan Quandt, the billionaire heir to a big chunk of BMW.
Now Scope Ratings is attempting what others have failed at in challenging the dominance of the three massive ratings agencies.
Moody’s, Fitch, and Standard and Poor’s currently control 92 percent of the European ratings market.
Companies and institutions that borrow money pay the agencies to evaluate their creditworthiness.
The highest score on offer is the sought-after “triple-A” – and the better the score, the easier it is to raise money on favourable terms.
Scope notched up a big milestone in August, signing up its first client on the benchmark DAX 30 index of leading German shares in Munich-based industrial gases firm Linde.
But Scope is still far from the gargantuan scale of the US agencies, accounting for just 0.14pc of the European market in 2014, according to the European Securities and Markets Authority (ESMA), and around 1pc more recently, Scope’s own internal estimates suggest.
Scope has so far been able to raise money every time it has wanted to expand, allowing it to focus on growth rather than profitability.
Mr Hinrichs acknowledges that the agency is losing money, although he keeps the figures close to his chest.
ESMA has licensed 26 ratings agencies in Europe, making for a fragmented market on the continent.
Scope hopes to change that, and has spent US$22.7 million opening offices in Paris, Milan and Madrid over the past three years.
The agency currently has 60 employees, 35 of them analysts.
“We’re in talks with other European agencies,” Mr Hinrichs said. “We can all see the aim of creating a counterweight to the Americans.”
He argues that “there has long been a demand for alternative approaches to ratings”, which take a nuanced view of European firms and offer “more realistic” prices compared with the “oligopolistic way of thinking” practised by US competitors.
Scope says it uses a more subjective, less robotic method of rating, as well as rewarding the unique strengths of European companies more generously than its counterparts across the Atlantic.
Whether firms are family-owned – seen in Europe as a guarantor of stability – their cash reserves and pensions commitments are some of the factors Scope says count for more in its model than that of the Americans.
Founded in 2002, Scope began by rating funds and small and medium sized enterprises, but has since broadened its ambitions to cover all kinds of asset classes.
By acquiring Germany’s Feri EuroRating, Scope has added government debt to its portfolio, currently rating 59 different nations’ bonds.
The task Scope faces is far from easy. It’s fighting a battle others have lost in the past, with German consultancy Roland Berger abandoning its own fledgling ratings agency in 2012 for lack of funds.
Politicians have bemoaned US dominance in ratings since the 2008 financial crisis, when some blamed the big ratings firms for failing to see the disaster coming.
Attempts to boost the European competition have sputtered. Scope hopes to buck the trend. –
Torsten Hinrichs, the head of Scope Ratings, believes his company can take on US ratings giants like Moody’s.