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
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
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
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.
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