Founded 2001 | Parent organization Howland Partners LLC | |
James gellert of rapid ratings international discusses mf global credit ratings regulation
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. Rapid Ratings rates over 14,000 public companies and thousands of private companies for its clients.
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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.
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. Alternatively, Rapid Ratings is paid by subscribers to its service, with no contact in the rating process with the companies it rates.
It gained attention for detecting inefficiencies at MF Global, Enron, WorldCom, Parmalat, General Motors, Bear Stearns, Ford, US Steel, and Peregrine. All of these companies had ratings well below investment grade for years before traditional agencies downgraded them.
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. FHRs are calculated using purely fundamental data from a company’s financial statements. They take into account no market inputs, no analysts, and no contact in the rating process with issuers, bankers, or advisors. This allows the company to rate publicly traded and privately owned firms on the same basis. The system uses over 70 efficiency ratios and places companies into 24 industry groupings, allowing it to measure industry-specific risk.
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. 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.
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. Clients include Microsoft, Nasdaq and Hess Energy.
Congressional Involvement
The firm’s CEO and chairman, James H. Gellert, has spoken extensively about increasing competition in the ratings industry. Gellert has testified to Congress and the SEC six times to discuss Rapid Ratings’ FHRs and promote rating industry reform.
MF Global Collapse
On May 11, Rapid Ratings testified alongside S&P and Moody’s about the collapse of MF Global. 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. At the time of the filing, it had an FHR of 23.
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. 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.