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Regulators and bankers are sounding the alarm about an explosion in privately-rated securities

Seventeen years after credit rating agencies’ starring role in the financial crisis, “ratings shopping” is in focus again.

The first time around, large established agencies competing to grade a finite pool of debt gave out inflated stamps of approval to risky assets. Buyers of the assets were falsely left with the impression that the subprime credit they were holding was as safe as it got.

This time it is not the big three agencies of Moody’s, S&P and Fitch that are in the line of fire, but second-tier shops that have shot to prominence by catering to the booming private credit market, which has grown to some $3tn in recent years.

Smaller, specialist providers such as Morningstar DBRS, Kroll Bond Rating Agency, HR Ratings and Egan-Jones have seized market share by offering private capital groups the chance to shop around.

Some of the world’s biggest asset managers, including Blackstone and Apollo, are now among the most frequent users of ratings from firms beyond the big three.

But as sudden bankruptcies at First Brands and Tricolor have fuelled fears that cracks are emerging in the private credit universe, some financial heavyweights are warning that ratings arbitrage could pose risks to the wider financial system.

UBS chair Colm Kelleher warned last week that insurers shopping for better ratings on their private credit assets was creating a “looming systemic risk”, while Bank of England governor Andrew Bailey said industry figures were sounding the alarm to him about “the role of the rating agencies”.

“What you’re seeing now is a massive growth in small rating agencies ticking the box for compliance of investment,” Kelleher said.

Private letter ratings are not disclosed publicly, but can be used to determine capital requirements.

As private capital groups have boomed — and piled into the insurance industry, buying up life insurers — so has the demand for private letter ratings on everything from debt issued by individual portfolio companies to slices of asset-backed securities packaged into bonds destined for investment-grade buyers.

Insurers affiliated with the private capital groups use those investment-grade credit ratings to trim the capital they are required to have to back their long-term obligations to retirees.

As their needs have grown, the big private capital firms have turned to the smaller agencies as they seek a faster, more flexible service to suit their complex needs.

Private capital groups are defending the use of smaller agencies for the ratings — to a point.

Apollo’s chief executive Marc Rowan insisted on the company’s earnings call on Tuesday that Kelleher was “just wrong”. DBRS and KBRA had developed specialist expertise in an important niche, he insisted, and they were “doing a good job competitively, with Moody’s, S&P and Fitch close on their heels”.

Rowan did distance Apollo’s insurer, Athene, from one trailblazer that had thrust themselves to the fore of the market for ratings.

“Athene does not use Egan-Jones, let’s start with that.”

Egan-Jones, which first began issuing private ratings in 2014 and now has more than 22,000 transactions to its name, has come under scrutiny for the sheer volume of ratings it has been able to issue with relatively few analysts in very little time. 

Egan-Jones has just 20 or so analysts and managed to issue more than 3,600 ratings last year alone, making it the most prolific grader of loans to individual businesses. Egan-Jones told the FT it had issued another 3,400 so far in 2025.

Some of the biggest names in private credit have sought to distance themselves from the firm. As well as Apollo, Blue Owl and BlackRock have singled Egan-Jones out as the only ratings company that they will not accept a valid rating from in some of their fund documentation.

Some ratings analysts said that they had recently been approached by issuers and loan sponsors who asked them to quote ratings on issuers that had been assessed by Egan-Jones.

As sponsors of middle-market borrowers found that they were taking “a lot of heat” from regulators over ratings from Egan-Jones, one person said, their agency had been approached with lists of businesses that had received BB ratings from HR or Egan-Jones.

Their agency typically produced ratings that were several notches lower, the person said, ranging from CCC+ to B-.

Egan-Jones said that “nearly 600 clients have trusted Egan-Jones to provide high quality ratings since 1995 and the data confirms the accuracy of our work. Our realised defaults on the private debt side are far lower than would be expected based on our ratings”.

It added that “outside of surveillance and subscription ratings, which are narrow in scope and require less analyst time, our analysts have on average, more than 13 days to produce ratings for new deals”.

Between them, the second-tier firms of Egan, HR, DBRS and KBRA issued more than 6,000 private letter ratings in 2023, about three-quarters of the total. The number of private letter ratings issued by Moody’s, S&P and Fitch has stayed around 1,000 between 2020 and 2023.

Although DBRS and Egan-Jones have existed for decades, HR and KBRA have emerged far more recently. HR started in Mexico in 2007 providing public ratings to domestic borrowers before pushing into the US in 2012, while KBRA was set up in 2010 by corporate intelligence pioneer Jules Kroll as a post-crisis alternative to the big three.

The second-tier providers argue that they have thrived because they offer a more tailored approach and are willing to pick up business from complex investment structures or smaller issuers.

“What we’re offering is a very high-touch product,” said Michael Dimler of DBRS, who leads the agency’s private credit rating business for single-name borrowers. By specialising in smaller companies with a median annual revenue of about $300mn, Dimler’s team of analysts has almost doubled to nearly 30 in five years. 

HR and Egan have both focused on loans to single borrowers rather than complex structured products such as collateralised loan obligations in which corporate loans of varying quality are bundled together into securities whose top tranches may then be awarded a triple A rating.

Part of their pitch is speed, pricing and a less “punitive” approach to rating smaller companies than the big players, HR told the Financial Times.

“We’re not going to be an Egan-Jones, time-wise, but we’re quicker than what we’re hearing about some of the others,” Gregory Root, business development executive director at HR Ratings, told the Financial Times.

HR declined to disclose its fees, but said that clients generally paid one pricing tier for ratings from the big three, and a second tier for KBRA, DBRS, HR and Egan.

Rather than single-name borrowers, both DBRS and KBRA have carved a niche in more complex structured products such as collateralised fund obligations (CFOs), which can package up ownership stakes in hundreds of private equity-owned companies.

These instruments have boomed as insurers and other credit investors have sought higher yields in private markets.

KBRA, which is now controlled by Boston-based private equity firm Parthenon Capital Partners, has “more than 70 analysts dedicated to its funds and private credit ratings”.

About half of its ratings are in structured finance, while the other half include corporates, financial institutions and governments.

KBRA “work in areas that are new or very complex,” said William Cox, chief rating officer, since “we were specifically created to serve investors with more in-depth research”. Those include commercial and residential mortgage-backed securities and asset-backed securities such as music royalties.

“DBRS and Kroll have most of the expertise right now in structured products, and they are doing a good job competitively with Moody’s, S&P and Fitch close on their heels,” Apollo’s Rowan said.

“I object to lumping in Kroll and DBRS with Egan,” another asset management executive told the Financial Times. “They’re now basically real ratings [agencies].”

But although these agencies have been hired by top-ranking private credit funds to rate private loans and structured products, concerns that initially centred on Egan-Jones have rippled across the group.

At issue is whether the smaller rating agencies may award higher ratings than their larger, more prestigious peers, when rules tightened after the financial crisis require them to manage potential conflicts with their commercial interests.

Last month the Bank for International Settlements said ratings on private credit assets held by US insurers might have been inflated by smaller providers, who may face commercial pressure to assign more favourable scores.

It said the strategy could “lead to inflated assessments of creditworthiness” and “obscure the true risk of complex assets”, and warned of the growing risk of “fire sales” during periods of financial turmoil.

When the National Association of Insurance Commissioners published a report last year that found smaller rating agencies had assigned more generous scores to private credit investments than larger ones did, KBRA criticised it as “statistically unsound”. The NAIC ultimately withdrew it.

Egan-Jones said its “public ratings were similar to those of another major rating agency in 2024 — within 0.19 notches (weighted average) for the 1,170 issuers rated by both agencies”.

“The other major rating agency had an equal or higher rating relative to Egan-Jones 60.7% of the time. The market generally considers one notch to be immaterial,” it added.

If it were up to the rating agencies themselves, several people said, they would happily publish their private ratings, which they said they treated no differently than public ones.

“We do very, very normal due diligence. We do a very, very normal process of understanding the entity, going through financials, writing the full report,” HR chief executive Pedro Latapi told the FT.

“What we can offer to the entities is a very normal look and feel, in terms of rating agency.”