Moody's Investors Service and Standard & Poor's Ratings Group sometimes seem to operate with cookie-cutter similarity, but that hasn't been the case in the fledgling business of rating syndicated bank loans.
One difference stems from a divergence between the agencies in how they expect to be compensated for their service. S&P's approach is similar to the agencies' usual way of handling corporate debt, in that it rates loans only at the request of the borrower.
Moody's, which bills investors and sometimes borrowers for the loan ratings, has rankled some money-center bankers with an unusually aggressive approach to the loans - sometimes rating them without even consulting the lender or borrower.
A second key difference is that Moody's uses the same rating scale for corporate debt and loans, while S&P has devised a new 1-to-10 scale especially for the bank loans.
Representatives of the two agencies, which have been rating bank loans for less than a year, spelled out the differences and defended their respective approaches at a Loan Pricing Corp. conference in New York this week.
With $40 billion in loans already rated, Moody's hopes to have at least $80 billion rated by the end of the year, said Michael Dommermuth, the agency's managing director of corporate finance.
"Long term, we expect to have total coverage of the bank loan market," he said.
Mr. Dommermuth said that while the ratings may seem superfluous today, when the credit cycle turns downward - perhaps by 1998 - investors will need an objective risk measure to avoid bad loans.
Mr. Dommermuth said that Moody's ratings will be especially helpful to foreign banks that invest in the syndicated loans. The new ratings will enable them to make quicker investment decisions.
Moody's feels, however, that meetings with the management of borrowers and lenders are not a prerequisite for a bank loan rating, Mr. Dommermuth said.
Mr. Dommermuth said that the same people rate the bonds and the loans, so they already have an intimate understanding of the company, and more important, of the loans, which have a direct bearing on the bonds.
What's more, he said, the use of the same rating system will give investors a better benchmark for evaluating the loans.
"You've got to be able to compare apples to apples," in making investment decisions, he said, arguing that the Moody's ratings will allow investors to make a direct comparison between an issuers' securities and loans.
Steven Bavaria, the director of private placements and bank loans at Standard & Poor's, said his agency plans to build the business "one customer at a time."
He argued that the rater "needs a dialogue before rating the issue."
Mr. Bavaria said that S&P has discussions with borrowers and lenders to determine how various covenants or loan structures will affect a rating.
He said S&P devised its special 1-to-10 scale so that the loan rating will reflect the differences between the loan and a company's general debt ratings.
Ideologically, Moody's emphasizes the convergence of the bank loan market with the bond and securities markets, while S&P sees ratings as an opportunity for banks, among other things, to validate the credit story of their borrowers.
S&P's Mr. Bavaria also emphasized how loan ratings can give issuers and their lead banks an easier time presenting a loan for a riskier or harder to understand credit to a prospective syndicate group.
Despite their differences, both agencies believe the ratings will add to the liquidity of the marketplace and lead to more efficient loan pricing.
"Locating a loan on the yield curve will help exploit the pricing differential out of the market," said Mr. Dommermuth.
Some bankers are convinced that over time, the market will benefit from both rating tools.
"The market will absolutely embrace both of these over time," said Jamie C. Lewis, a division executive and managing director at the Bank of Boston. "It's a great thing, and it'll help the secondary market along the way."
