Newsmaker: Making credibility count

Turnbull, a 59-year-old investment banking veteran, has been charged with leveraging his extensive contacts to expand the agency’s business in Canada, even as DBRS looks to become a bigger global player.

In December 2014, asset manager the Carlyle Group and private-equity firm Warburg Pincus LLP acquired DBRS from Walter Schroeder, who founded the firm as Dominion Bond Rating Service Ltd. in 1976. Carlyle and Warburg each took a 46.5% stake, and 7% is held by members of the existing DBRS management team and Schroeder.

DBRS’ headquarters remain in Toronto, where 171 employees of the global force of 406 work. However, DBRS’ CEO, Dan Curry, operates out of the firm’s New York office. DBRS also has offices in Chicago and London.

The DBRS role represents a new chapter for Turnbull, who has 36 years’ experience working with government, corporate, and public-sector clients on public- and private-market deals, but who has never worked at a rating agency before. Most recently, Turnbull served as deputy chairman of TD Securities Inc., the capital-markets arm of Toronto-Dominion Bank. He also has served on numerous boards of directors, including for the Toronto Financial Services Alliance.

DBRS provides credit ratings for more than 1,000 companies that issue commercial paper, debt and preferred shares, as well as for various investment vehicles. DBRS is the fourth-largest rating agency in the world, but it remains a minnow relative to the credit-rating industry’s Big Three: Standard & Poor’s Financial Services LLC and Moody’s Investors Service, Inc., both based in the U.S.; and Fitch Ratings Inc., co-headquartered in New York and London. The trio collectively share about 95% of the global market; DBRS estimates that its share is 2%-3%.

DBRS does, however, enjoy a dominant position in Canada, where it rates most debt issuers, according to Turnbull. Still, the agency isn’t looking just to solidify that competitive position in Canada; Turnbull wants to expand the agency’s reach.

“I think we have lots of room to grow [our market share], both with corporations, banks and insurers, and with public-sector pension plans,” Turnbull says. “When you look at Toronto and Canada [as a whole], it is sometimes easy to forget that we have big global financial institutions that just happen to be located right here. I think there are lots of opportunities to do more business with all of those entities.”

DBRS’ relationships with domestic issuers can be leveraged to help it expand its business outside of Canada, Turnbull says: “We want to follow our clients abroad with their core activities, their acquisitions and their capital-market activities. And we want to ensure that anyone coming into this country knows that we know Canada, its capital markets, its investors and its credit metrics better than anyone.”

DBRS has been pursuing an ambitious global growth strategy, including hiring more staff, having increased its head count by 250% in the past six years. The agency also is launching a Mexico City office, hoping to expand business in Latin America.

Rating agencies are enjoying good times again after some dark days following the global financial crisis of 2008-09. Corporations, governments and other issuers need ratings to sell their debt instruments, with regulators often requiring a rating. For example, DBRS is one of 10 agencies that qualify as “nationally recognized statistical rating organizations”(NRSROs), a designation conferred by the U.S. Securities and Exchange Commission (SEC). Only ratings from NRSROs are acceptable for certain U.S. regulatory purposes.

“If you get that designation, you get a licence to make money in this business,” says Michael King, associate professor of finance with the Ivey Business School at the University of Western Ontario in London, Ont.

DBRS, as a privately held firm, does not report its earnings, but does state that it generated a 14% compound annual growth rate in billings over the 2009-14 period.

Not long ago, the outlook wasn’t so rosy for rating agencies. Agencies were given some of the blame for allowing the global financial crisis to happen by providing strong ratings on certain debt products, such as mortgage-backed securities, which ended up failing spectacularly. In the aftermath, rating agencies’ business dried up, and they were assessed fines and took a reputational hit.

DBRS has not been immune from controversy – including in 2007, when the Canadian asset-backed commercial paper (ABCP)market froze during a liquidity crisis. DBRS had been rating ABCP, in effect giving it the agency’s blessing. Following that crisis, DBRS struggled and cut staff.

In 2015, the SEC charged DBRS with misrepresenting its surveillance methodology for rating certain complex financial instruments in 2009-11. DBRS agreed to pay almost US$6 million to settle the charges without admitting or denying the SEC’s findings.

To be sure, in the years since the global financial crisis, the regulatory framework governing rating agencies has tightened globally. DBRS is regulated by the Ontario Securities Commission in Canada, by the SEC in the U.S. and the European Securities and Markets Authority in Europe.

Greater regulations are a positive for the credit-rating industry, which is stronger now than it was eight years ago, Turnbull says: “The process around which rating agencies operate has become much more transparent, but also more robust.”

However, King suggests, increased regulatory scrutiny is unlikely to mitigate entirely the potential conflict of interest that remains at the core of the industry’s business model, in which issuers pay for the ratings on the debt they issue. Only the most sophisticated investor, King says, would be capable of checking a rating agency’s work to see if a rating was sound.

Turnbull says there’s a “bright line” at DBRS that separates the business side from the analysts who provide ratings: “We have a team of very skilled, knowledgeable [analysts] who cannot know anything about the commercial side of our business or the relationship with those companies we rate. And the reason is simple: there can’t be any influence brought to bear on [their] work.”

And DBRS’ future does look bright, King says, as global regulators look for issuers to provide ratings from more than one agency. DBRS’ Canadian pedigree also is a plus. “[Canadians] are viewed as trustworthy and conservative, which are both good traits for a rating agency,” King says.

Turnbull says that the competition from the Big Three is fierce, but he believes DBRS can benefit from leveraging its Canadian-based expertise, track record and brand. “If a sovereign [issuer] has four ratings, they probably don’t need a fifth,” he says. “But in many cases, [those issuers] might well want a Canadian [rating] added. That’s an opportunity for us.”

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