Kroll Bond Ratings Agency

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See also credit rating agencies.

Kroll Bond Ratings Agency is a privately held company and is designated as an Nationally Recognized Statistical Rating Organization (NRSRO) by the Securities and Exchange Commission (SEC).

Kroll purchased LACE Financial Corp. which was founded in 1984 by Dr. Barron H Putnam.


Company overview

LACE Financial specializes in issuing credit ratings of financial institutions.

It provides credit rating services on approximately 19,000 domestic and international financial institutions, title insurers, trust preferred security issues, and foreign country sovereign ratings.

LACE Financial does not accept compensation for its ratings and is therefore independent and unbiased when assigning credit ratings. Typical clients which use LACE Financial's credit ratings include cash managers and treasurers of Fortune 500 companies, state municipalities and other government agencies, investment banks and portfolio managers. [1]

LACE purchased by Kroll

Onetime corporate sleuth Jules Kroll is reinventing himself as an investigator of bonds.

The 69-year-old mogul, who founded and later sold security firm Kroll Inc. for $1.9 billion, acquired boutique credit-ratings firm Lace Financial last week in an effort to build staff and get the licenses needed to compete with the three big rating firms, Standard & Poor's, Moody's Corp. and Fitch Ratings.

"There's a need for a credible alternative," said Mr. Kroll, who last year started Kroll Bond Rating Agency Inc. to take on the incumbents. He poured about $5 million of his own money into the venture and hired about a dozen employees, including former executives from Moody's and Fitch, a unit of Fimalac SA of Paris. Then last week he decided with the help of new investors to spend more than $5 million for Lace, a 25-year old company with about a dozen employees that mainly rates banks and other financial-services firms.

One key attraction of Frederick, Md.-based Lace is that it has the regulatory licenses with the Securities and Exchange Commission to be a nationally recognized bond-rating firm. "A lot of investors have no choice but to use" a rating firm recognized by the SEC, said Mr. Kroll from his firm's new office in Midtown Manhattan.

Kroll's Plan

How Kroll's credit-ratings venture will try to stand out:

  1. Perform more 'due diligence,' beyond data from bond issuers.
  2. Accept much of its pay from investors who subscribe.
  3. Provide ratings in some cases when issuers don't want one from Kroll.
  4. Provide supporting materials with ratings so investors can see why a rating was given

Mr. Kroll's entry into the business is the latest move by an upstart trying to take advantage of perceived weakness from the three largest credit-rating firms, which have been around for decades and have long dominated their important niche of Wall Street: communicating a bond's risk to investors in a simple alphabetical code.

Regulatory advantages helped maintain the dominance of the big three ratings firms. But in recent years Congress has acted twice to reduce that dominance and open up the market to new entrants. In May, research firm Morningstar Inc. paid $52 million to buy Realpoint LLC, which held a license for its work specializing in rating structured-finance transactions.

"It's very clear that major rating firms have not served the market particularly well in the recent past, so it's wonderful that there's some competition for them," said Sean Egan, managing director at boutique rating firm Egan-Jones Rating Company. "They obviously need it."...

...Kroll is still a minnow in the world of bond ratings. With Lace, which will maintain its name as a unit of Kroll, the firm will have about two dozen employees, compared with 1,300 credit analysts world-wide at S&P and more than 1,200 at Moody's. Lace had only about $1 million of revenue in 2009 compared with $1.2 billion for Moody's Investors Service and $1.7 billion for the rating unit of Standard & Poor's...

...With the deal last week to buy Lace, Kroll Bond Ratings also accepted $20 million in funding from investors including Bessemer Ventures Partners and RRE Ventures.

The investors are pouring money into a business that faces hurdles, from heavier regulation to efforts by users of bond ratings to find other methods to assess the risk in their portfolios. Mr. Kroll said, for instance, that he has met with representatives from insurance companies to discuss their efforts to rely less on bond ratings.

LACE sanctioned by SEC

The SEC issued an administrative Order against LACE Financial Corporation, a registered Nationally Recognized Statistical Rating Agency (NRSRO), and Barron Putnam, its founder and majority owner during the relevant time period. The Order finds that LACE made misrepresentations in its application to become registered as an NRSRO and its accompanying request for an exemption from a conflict-of-interest provision.

Pursuant to the Order, LACE is censured and ordered to pay a $20,000 penalty, and LACE and Putnam are ordered to cease-and-desist from committing or causing any violations and any future violations of these provisions. LACE and Putnam consented to the issuance of the Order without admitting or denying the findings.

Exchange Act Rule 17g-5(c)(1) (the Ten Percent Rule) prohibits an NRSRO from issuing or maintaining a credit rating solicited by a person that, in the most recently ended fiscal year, provided the NRSRO with net revenue equaling or exceeding ten percent of the NRSRO’s total net revenue for the fiscal year. In its NRSRO application and request for an exemption from the Ten Percent Rule, LACE materially misstated the amount of revenue it received from its largest customer during 2007.

LACE also violated certain other provisions governing NRSROs by failing to disclose in its NRSRO application that it performed an extra layer of review when determining credit ratings for certain issuers whose securities made up the pools of asset-backed securities managed by LACE’s largest customer, failing to maintain written policies and procedures governing this extra layer of review, furnishing inaccurate audited financials to the Commission for 2008, failing to maintain all e-mails concerning its credit ratings, and permitting Putnam to participate in determining the credit rating for an entity whose stock he owned.

The SECalso issued an Order against LACE’s former president, Damyon Mouzon. In the Mouzon Order, the Division of Enforcement alleges that as LACE’s president, Mouzon was responsible for ensuring the accuracy of the information provided to the Commission in connection with LACE’s NRSRO application and its request for an exemption from the Ten Percent Rule, and that he knew or should have known that LACE’s representations regarding the amount of revenue received from its largest client during 2007 were inaccurate.

The Division of Enforcement further alleges that Mouzon knew or should have known that LACE was required to disclose the extra layer of review performed for certain issuers in its NRSRO application and maintain written policies and procedures governing this extra layer of review, but failed to ensure that LACE did so. The Division of Enforcement also alleges that, as LACE’s president, Mouzon was responsible for managing the firm’s operations and knew or should have known that, as a registered NRSRO, LACE was required to retain all e-mails relating to its credit ratings, but failed to ensure that LACE did so.

The Division of Enforcement alleges that, as a result of this conduct, Mouzon was a cause of LACE’s securities violations. A hearing in this matter will be scheduled before an Administrative Law Judge, who will hear evidence from the Division of Enforcement and Mouzon.


Senior officials at Kroll Bond Rating Agency and previous jobs they held
  • James Nadler, President and Chief Operating Officer; former executive vice president, Fitch
  • Jerome Fons, Executive Vice President, Strategy; former managing director, credit policy, Moody's
  • Ellen Coleman, Director of Underwriting Review; former mortgage and treasury official, Countrywide
  • Robert Anselmi, General Counsel, Chief Compliance Officer; former NY Life Investment Management, general counsel
  • Ajay Junnarkar, Chief Financial and Administrative Officer; former Marsh & McLennan senior finance official

Rating system explanation

LACE RATING from company website

The LACE rating criteria derives a financial rating based on key financial ratios representing (LACE):

  • Liquidity
  • Asset quality
  • Capital
  • Earnings

Absolute tests determine if there is a significant difference between a current ratio and the ratio value for a normal. The purpose of these tests is to identify a significant deterioration in the financial soundness of an institution within a peer group. If one were to rate an institution objectively only on a peer basis alone, a major deterioration in a institution's financial condition may not be picked up in the ratings. A score of financial soundness is then derived for each institution and mapped into a financial rating ranging from "A+" to "E". For larger bank holding companies, a separate financial analysis in performed each quarter that re-evaluates their ratings. Discussions with management may occur when we feel a major downgrade is warranted, or when we feel that a smaller institution maybe in danger of failing. Releases are sent to our clients when a large domestic or foreign bank is significantly downgraded, and each quarter additional releases are sent to clients about institutions whose financial condition is of concern to LACE. [2]

A downward trend in the LACE Rating is a likely indicator of deterioration in the institution's financial condition and a steady increase in the rating generally signals an overall strengthening of the institution's financial position.

A high steady "A" or "B+" rating indicates a strong financial condition.

Most institutions will fall into the "A" and "B" rating categories.

Institutions having a "C" or below rating are considered below investment grade.

These banks are likely to have either a relatively weak overall financial condition or a weakness in one more of the key financial ratios, likely falling into the bottom quartile of their peer group.[3]

"D" and "E" rated institutions are likely to have financial problems (poor LACE financial ratios) and careful consideration should be made about investments in these institutions. These entities are likely to have a higher probability of failure than institutions with higher ratings.

Under the LACE Rating® caption, an "NB", "NT", or "NCU" institution stands for a new bank, thrift, or credit union, respectively, whose charter is less than three years old.

An "NR" stands for not rated. Institutions receiving an "NR" are atypical institutions that LACE Financial Corporation has decided not to rate, or there maybe incorrect or missing data.

It should be noted that fraudulent reporting by institutions of their financial data may result in incorrect LACE ratings. The ratios listed below are some of the key indicators of an institution’s financial soundness used in the LACE Financial Rating system. [4]

NRSRO designation

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