24 May 2018

Kroll Helps Smaller Banks

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In recent months, Kroll Bond Rating Agency Inc. has given its seal of approval—in the form of investment-grade ratings—to nine smaller commercial banks, and six of them have sold bonds to investors. The other three banks are weighing whether to issue bonds. Kroll says it expects to rate an additional 10 banks by the end of October.

Kroll's ratings have jump-started a market that almost didn't exist until about six months ago. Analysts say there have been only a handful of stand-alone bond deals involving community banks in the past several decades.

Kroll's involvement is key because most investors—especially big buyers like pension funds and insurance companies—won't buy unrated debt. The two biggest credit-rating firms, Standard & Poor's Ratings Services and Moody's Investors Service, have generally not rated community banks because those lenders haven't seen the bond market as a viable capital-raising option. That has changed in a climate of low interest rates and strong demand from investors for debt paying a decent yield.

In the ratings industry, issuers typically pay to have their bond deals graded, and the larger ratings firms have focused on more lucrative offerings. Kroll, meanwhile, is developing a reputation as willing to evaluate smaller banks and charge lower fees. Now, S&P and Moody's say they also have recently begun reaching out to more community banks about possibly rating future deals.

Kroll, started four years ago by corporate investigator Jules Kroll and one of a number of smaller ratings firms to start up in recent years, is eager for the business, said R. Christopher Whalen, the Kroll senior managing director who in April started overseeing the community-banking push. Mr. Whalen, who previously worked as a banking analyst and in that role was often critical of the biggest U.S. banks, said Kroll sees the market as a potentially sizable niche, given that there are about 1,000 banks holding assets between $1 billion to $10 billion.

After the Kroll-rated deals were completed, advisers and other issuers said, S&P and Moody's raised their outreach to community banks. While Kroll has made strides in rating commercial-real-estate deals, it still is tiny compared with S&P or Moody's. It accounted for less than 1% of ratings issued in 2012, according to the Securities and Exchange Commission's most recent industry report.

Kroll had originally considered using a different business model than S&P or Moody's, where investors—not bond issuers—pay. But the company ended up going with the conventional payment model.

The community-banking sector is recovering after getting pummeled during the financial crisis. About 450 banks closed between 2009 and 2013. Now, the surviving banks are stronger and searching for cash to fund acquisitions, comply with coming capital requirements and keep pace with strong demand for business loans, said Chris Cole, executive vice president at the Independent Community Bankers of America, a trade group representing more than 6,500 banks.

Some investors are cautious about community banks, given that such lenders often have heavy concentrations in certain regions or industries, leaving them more exposed than larger, more diversified banks.

Click here to access the full article on The Wall Street Journal. 

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