Credit Rating Upstart UCRG Takes Aim at Big Three

SIX YEARS AGO, IF RICHARD HAINSWORTH of Moscow’s RusRating had said that he and two partners from China and the U.S. were forming an “alternative voice to the New York–centric world of ratings agencies,” laughter would have ensued. But no one was chuckling when Hainsworth recently announced the launch of Hong Kong–based Universal Credit Rating Group, a joint venture among his firm, Dagong Global Credit Rating Co. and Egan-Jones Ratings Co. “The international agencies fundamentally have their offices in New York, and that has created a way of looking at the world,” contends Hainsworth, who founded RusRating in 2001 and is UCRG’s chief executive. “But there are other ways to look at it, and sometimes it is better in predicting how things work.”

RusRating is Russia’s most influential credit rating agency; launched in 1994, Beijing-based Dagong is the market leader in China. Both will bring an “emerging-markets perspective” to corporate and sovereign ratings at UCRG, says Hainsworth, 55. The British expat has worked in Moscow since 1982; he went out on his own after helping information conglomerate Thomson Corp. (now Thomson Reuters) set up a local office for Thomson Financial BankWatch, its former bank rating service.

UCRG’s timing is opportune. The Big Three agencies — Fitch Ratings, Moody’s Investors Service and Standard & Poor’s — hurt their reputations by giving top ratings to complex mortgage-backed securities that blew up, helping to trigger the global financial crisis. The agencies have also taken flak for potential conflict of interest because they are paid by companies and issuers whose securities they rate.

“UCRG will be a strong advocate for bringing back real accountability and transparency into the ratings process and ultimately fostering greater competition in the marketplace,” says director Sean Egan, president of Haverford, Pennsylvania–based Egan-Jones.The UCRG partners aren’t beyond reproach, though. In August 2012, when Dagong downgraded U.S. debt for the second time, from A+ to A, it gave China’s scandal-plagued Ministry of Railways its highest rating of AAA and put the country’s debt at AA+. This April the Securities and Exchange Commission accused Egan-Jones of overstating its expertise in its 2008 application for accreditation and banned the firm from rating U.S. Treasuries for 18 months.To avoid relying too heavily on the companies that pay for its ratings, UCRG will sell subscriptions to investors and intends to generate revenue through databases, conferences and other services, explains CEO Hainsworth.

UCRG expects to receive a Hong Kong rating license this year. Most early customers will probably be Dagong and RusRating clients from China and Russia, but the plan is for Egan-Jones to secure U.S. business. UCRG launched with $9 million in capital, $3 million from each founding firm. It hopes to raise between $50 million and $300 million in the next few years, Hainsworth says, noting that he and his partners would prefer private equity investment.

It will be tough for UCRG to gain market share beyond its home territory, predicts Hubert Tse, a senior partner with Shanghai-based law firm Boss & Young. “Whether companies outside of Russia and China would be willing to pay to be rated by an agency they have not heard of is difficult to say,” Tse adds. “Global finance is still dominated by the West.” Still, Dagong and UCRG chairman Guan Jianzhong thinks the new agency will bring positive change. “The current rating system needs reforming and new thinking,” he says.

Dagong and RusRating clients will be able to obtain a domestic rating from those agencies and an international one from UCRG. “We want UCRG to be seen as independent, not an extension of RusRating, Dagong or Egan-Jones,” Hainsworth says. “But we will borrow and adapt the best practices from each of the three agencies.” • •

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