Fitch Investors Service, in the course of rating Financial Guaranty Insurance Co., is turning the industry's fee structure on its head.
The rating agency will not charge issuers a dime, deriving its entire fee from an annual assessment on the bond insurers. Currently, municipalities are charged rating fees on a deal-by-deal basis by Standard & Poor's Corp. and Moody's Investors Service.
Russell P. Fraser, chairman of Fitch, said the FGIC rating and subsequent bond insurance ratings will be on a "relationship" basis, which is exactly how corporate issuers are charged. When he was president at AMBAC Indemnity Corp., Mr. Fraser said, "I thought the individual fees we were charged for each deal were ridiculous."
Furthermore, the very practice of charging municipalities for a rating that is concurrent with an insurance policy may be suspect, he said. "If you have an insurance company, and they sell a policy, and somebody else charges a fee," Mr. Fraser said, "that can be classified as a tie-in sale, I believe."
Officials at both Standard & Poor's and Moody's declined to comment on Fitch's pricing strategies. Sources in the industry, however, questioned what the outcome would be for the upfront premiums charged by Fitch-rated insurers.
"Fees are the things reducing the bottom line at an insurer," said one underwriting executive, who asked not to be identified. "Where is FGIC going to make that up? If they don't get better trading value, then they may have to pass that on to the issuer."
Part of the fallout from Fitch's fee structure is to allow FGIC's guarantee to remain the same cost to future tax-exempt issuers. Borrowers will not have to cut a separate check to Fitch, so FGIC's policy will not appear financially punitive compared with the other insurers.
But the long-term goal of the pricing structure is to end the charging of issuers for insurance ratings altogether, according to Mark H.S. Cohen, managing director at Fitch. "Issuers haven't got any money, so they don't want to pay any money," he said.
Mr. Fraser also addressed a recent Standard & Poor's program of rating the underlying creditworthiness of insured municipal bonds. Unless both the issuer and insurer approached Fitch requesting such a rating, he would strongly oppose the practice, he said.
"Putting out the rating of the underlying issuer confuses the matter and confuses the market," Mr. Fraser said. "It's hard for any one issue to have two ratings: Either it is triple A or it isn't."
Another issue is whether the other rating agencies are actually working for their insured bond fees, Mr. Fraser added. If Fitch evaluated every single issue, he said, it would be appropriate. "But we're not charging for what we don't do," he said.
Officials at Fitch declined to say exactly how much FGIC was assessed for its triple-A, but it amounted to more than what Standard & Poor's or Moody's currently charges the insurers annually. Factoring out the income from issuers, however, Fitch would take in less than the other two major agencies.