Rapid Ratings International

Rapid Ratings International, Inc., is an independent ratings, research and analytics firm that uses a proprietary quantitative system to rate the financial health of corporations and financial institutions. The company generates revenue through a user-paid model, wherein customers pay a subscription fee to access public company ratings or request ratings on their privately held counterparties. This contrasts with the controversial issuer-paid model employed by many of the Nationally Recognized Statistical Rating Organizations (NRSROs), such as Standard & Poor’s, Moody’s, and Fitch Ratings.[1] Rapid Ratings rates over 14,000 public companies and thousands of private companies for its clients.[2]

History

The framework for Rapid Ratings' Financial Health Rating technology was created in 1991 by economist Dr. Patrick Caragata in New Zealand. In 2007, the company was brought to New York City by James H. Gellert, CEO and chairman, and Douglas M. Cameron, president and director of rating operations.[3]

Rapid Ratings gained recognition in the wake of the 2008 global financial crisis, as traditional rating agencies were criticized for conflicts of interest inherent in their issuer-paid models and qualitative ratings.[4] Alternatively, Rapid Ratings is paid by subscribers to its service, with no contact in the rating process with the companies it rates.[5]

It gained attention for detecting inefficiencies at MF Global, Enron, WorldCom, Parmalat, General Motors, Bear Stearns, Ford, US Steel, and Peregrine.[6][7][8][9] All of these companies had ratings well below investment grade for years before traditional agencies downgraded them.[10]

Rating Method

Rapid Ratings’ proprietary quantitative system produces a Financial Health Rating (FHR) for each company: a single number on a worst-to-best 0-100-point scale.[11] FHRs are informed only by a company’s income statement and balance sheet. They take into account no market inputs, no analysts, and no contact in the rating process with issuers, bankers, or advisors.[12][13] This allows the company to rate publicly traded and privately owned firms on the same basis.[14] The system uses over 70 efficiency ratios and places companies into 24 industry groupings, allowing it to measure industry-specific risk.[15]

Over the past 20 years, approximately 90% of defaults have been rated below 40 by Rapid Ratings, falling into the company's High Risk and Very High Risk categories.[16] One academic study published in 2011 by two finance professors at Indiana University and American University found Rapid Ratings to lead Moody’s by 2.9 years in downgrading companies that ultimately fail.[17]

Rapid Ratings’ clients fall into a number of categories including financial investment and risk management, corporate supply chain risk management, financial services vendor management, and corporate credit risk management.[18] Clients include Microsoft, Nasdaq and Hess Energy.[19][20]

Congressional Involvement

The firm’s CEO and chairman, James H. Gellert, has spoken extensively about increasing competition in the ratings industry.[21] Gellert has testified to Congress and the SEC six times to discuss Rapid Ratings’ FHRs and promote rating industry reform.[22][23]

MF Global Collapse

On May 11, Rapid Ratings testified alongside S&P and Moody’s about the collapse of MF Global.[24] While S&P and Moody's issued MF Global investment grade ratings until days before it filed for bankruptcy, Rapid Ratings had rated MF Global as high risk for more than two years leading up to the filing.[25] At the time of the filing, it had an FHR of 23.[26]

NRSRO Status

Rapid Ratings has chosen not to apply to become a Nationally Recognized Statistical Rating Agency (NRSRO) for reasons that include increased liability exposure, increased operating costs, and complex internal process requirements.[27] Doing so would also threaten its intellectual property by requiring it to disclose the software behind its proprietary system, which allows it to function without bias.[28][29]

References

  1. ↑ Demos, Telis. "Twitter Squeezes Banks on IPO", The Wall Street Journal, New York, October 13, 2013.
  2. ↑ Heires, Katherine. "Unflinching on MF Global, Ratings Upstart Gains Following", Global Association of Risk Professionals, London, April 2, 2012.
  3. ↑ History, Rapid Ratings
  4. ↑ "James Gellert of Rapid Ratings International Discusses MF Global & Credit Ratings Regulation", MarketsWiki
  5. ↑ "The Collapse of MF Global", United States House Committee on Financial Services, Washington, D.C., February 2, 2012.
  6. ↑ Lehman, Richard. "The Ratings Game", Forbes, New York, August 15, 2005.
  7. ↑ "Reining in the Ratings Agencies", Fox Business Network, New York, December 9, 2008.
  8. ↑ "Ratings Agencies Under Review for Downgrade", The Wall Street Journal, New York, December 1, 2008.
  9. ↑ Gellert, James H. "Comment for General CFTC Public Roundtable Discussion on Additional Customer Protections", Commodity Futures Trading Commission, Washington, D.C., August 8, 2012.
  10. ↑ Bhattacharyya, Ronit. "Former S&P President Joins Rapid Ratings", Integrity Research Associates, New York, January 16, 2009.
  11. ↑ Farzad, Roben. "As Credit Quality Slips, Bond Investors Need Be Cautious", Bloomberg Businessweek, New York, January 4, 2013.
  12. ↑ Gellert, James H. "Transforming Credit Rating Agencies", Subcommittee on Capital Markets and Government-Sponsored Enterprises, Washington, D.C., September 30, 2009.
  13. ↑ Arvedlund, Erin E. "What Metal-Benders and Burgers Have in Common", Barron's, New York, April 5, 2010.
  14. ↑ "Innovation of the Year: Rapid Ratings", Risk, London, May 23, 2012.
  15. ↑ "Ratings: How Does Your Broker Rate?", John Lothian News, Chicago, December 17, 2012.
  16. ↑ Farzad, Roben. "As Credit Quality Slips, Bond Investors Need Be Cautious", Bloomberg Businessweek, New York, January 4, 2013.
  17. ↑ Cornaggia, Jess and Kimberly J. "Does the bond market want informative credit ratings?", Mendoza College of Business, Notre Dame, February 2, 2011.
  18. ↑ "How Rapid Ratings is Shaking Up a Cozy Triumverate", Forbes, New York, May 15, 2013."
  19. ↑ "Silver AHA Winner in Credit Risk Management", Treasury & Risk, New York, November 2, 2009.
  20. ↑ Osipovich, Alexander. "Credit rating agencies: what are the alternatives?", Risk, London, February 7, 2012.
  21. ↑ Younglai, Rachelle and Da Costa, Ana. "Insight: When ratings agencies judge the world?", Reuters, London, August 2, 2011.
  22. ↑ Oversight of the Credit Ratings Agencies Post Dodd-Frank, C-SPAN, Washington, D.C., July 27, 2011.
  23. ↑ Gellert, James H. "Testimony Concerning Proposals to Enhance the Regulation of Credit Ratings Agencies", United States Senate Committee on Banking, Housing, and Urban Affairs, Washington, D.C., August 5, 2009.
  24. ↑ MF Global Bankruptcy Investigation, C-SPAN, Washington, D.C., April 6, 2012.
  25. ↑ Protess, Ben and Ahmed, Azam. "Lax Oversight Blamed in Demise of MF Global", The New York Times, New York, February 2, 2012.
  26. ↑ Schmerken, Ivy. "Avoiding Another MF Global", Wall Street & Technology, New York, January 3, 2012.
  27. ↑ Gannon, Jr., Jack T. "Let's Help the Credit Rating Agencies Get it Right: A Simple Way to Alleviate a Flawed Industry Model", Boston University School of Law Review of Banking & Financial Law, Boston, 2011-2012.
  28. ↑ Wolcott, Rachel. "Start-up rating agencies urge national regulators to promote competition, change", Reuters, London, August 15, 2011.
  29. ↑ Robinson, Matt. "S&P Lawsuit Undermined by SEC Rules That Impede Competition", Bloomberg News, New York, February 6, 2013.
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