The bank loan rating systems introduced in the past few months by the rating agencies have met with some resistance in the market.
While bankers recognize that loan ratings by Standard & Poor's and Moody's Investors Service reflect the maturity and appeal of the bank loan market to a host of new investors, some have expressed concerns about the impact of the ratings on their ability to price loans.
Moody's more aggressive approach - rating loans regardless of whether it is invited to do so by a borrower or a bank - is especially irksome to some bankers.
"Of course the ratings could increase the efficiency of the market," said one banker, but "Moody's is taking a very hostile approach to the business. The process of getting a rating is a banker and issuer process, and Moody's is turning it upside down saying it is an investor-driven process."
Additionally, bankers complain that Moody's is somewhat new to the field, does not have the appropriate means of evaluating bank loans, and misses important points if it doesn't meet with management.
Moody's, however, said that its raters already have an integral understanding of issuers from bond ratings. "Every bank loan that has been rated thus far, with the exception of one, already had other Moody's ratings," said Michael Dommermuth, a managing director in charge of Moody's loan rating system.
The analysts have an understanding of bank loans, since they affect bond ratings, said Mr. Dommermuth.
Mr. Dommermuth adds that some bankers may resent an increasingly efficient market, since "some will benefit, while others, who don't respond to the changing market dynamics, will probably be hurt by efficiencies."
While Moody's readily admits that it issues loan ratings that are not solicited by bankers or borrowers, it says that investors, who already play an important role in the bank loan process, have expressed an interest and a need for an objective evaluation of loans.
Indeed, bankers and raters alike acknowledge that smaller banks, foreign banks, and the general nonbank institutional investor community are helping to create a more liquid and active loan market.
"Loans outperformed all other forms of assets," said Christopher L. Snyder, president of Loan Pricing Corp. "That's attracting the nonbank investment community, which has to have ratings."
Some industry observers noted that the process loans are going through mirrors that for other investment classes. "It's exactly the same type of path that private placements went through several years ago," said Kevin Meenan, a principal of Meenan, McDevitt & Co.. "That market went through its infancy of becoming a new capital market and now bank loans are following down that same path."
Mr. Meenan agreed that Moody's is well-qualified to evaluate loans because of its experience with other classes of investments. "Evaluating the credit worthiness of a balance sheet is something that's universal, whether it's a medium-term note, a private placement, a public debt offering, or bank loans," said Mr. Meenan.
Bankers said that ratings should increase liquidity, as loans become more actively traded in the secondary market.
"Third-party ratings on commercial loans should continue to attract fixed-income investors," said Chad Leat, the head of loan syndications at Chase Manhattan Corp. "Additional liquidity for bank loans is something you strive to achieve."
Bank syndicators have yet to embrace the ratings, however. "I don't think it is going to significantly drive the origination or primary syndication transactions," said Mark Smith, a managing director at First Chicago Corp.
"I believe the most significant impact will be in secondary trading," he said, "and there I believe it is a potentially significant development."