Role of Rating Agencies in Financial Turmoil

Moody’s has a new report on how advanced economies (AEs) are adapting their debt strategies: the US and UK leaning on shorter maturities, and Germany, Italy, and Japan extending maturities to reduce refinancing risk. I was struck again by rating agencies' different treatment of AEs vs emerging markets and developing economies (EMDEs). Moody's forecasts US' government interest-to-revenue at 12.7%, which it says “will weigh on sovereigns’ fiscal strength.” When EMDEs cross 10% interest-to-revenue, their debt affordability is generally defined as 'weak,' contributing to downgrades. The big 3 rating agencies have reasons for explicitly treating AEs and EMDEs differently. AEs have deep markets and reliable investor interest. EMDEs, by contrast, have shallow domestic capital markets. AEs benefit from global liquidity backstops (their central banks, reserve-currency status, and Fed swap lines), while EMDEs have little monetary autonomy and must rely on the scarce and conditional support of the IMF. But ratings reinforce this structural asymmetry. EMDEs rely disproportionately on concessional finance, intended precisely to reduce repayment risk. Rather than recognizing concessional finance as reducing repayment risk, the Big 3 instead discount it, arguing that concessional terms mask overall debt-carrying limits (despite AEs having much higher debt ratios than EMDEs). When EMDEs borrow on the markets, their low ratings push them into punishing loans with short maturities and high rates. When repayment pressures inevitably arise - often *liquidity* squeezes rather than insolvency - rating agencies confirm/amplify the repayment risk, leading to further downgrades and, in turn, higher borrowing costs. This is why sovereign ratings are criticized as pro-cyclical amplifiers. They: - discount the very instruments designed to reduce repayment risk, - conflate & penalize liquidity pressures vs insolvency, and - reinforce other structural biases, like AEs' reserve-currency privilege & access to swap lines. What can be done? For one, ratings should necessarily be modular, reflecting the specific terms and use of debt. Concessional finance should be reflected as lower risk. Funds invested in long-term productive assets (education, infrastructure, climate resilience) strengthen growth and repayment capacity. Modular ratings would encourage lending on constructive terms and support productive investments, with greater overall returns than in AEs. For investors, modular ratings would sharpen price discovery by distinguishing real repayment risks across instruments and expand the pool of investable assets by recognizing safer concessional or guaranteed debt. Alleviating blunt and biased risk perceptions would also support the deepening of domestic markets, contributing to EMDEs’ overall stability and growth prospects, and enabling them to build the policy flexibility on borrowing that AEs already enjoy.

Athene: Case Study in Private Credit, Insurance and Ratings Run Amok I recently published an article on Athene highlighting risks which implicated ratings and ratings agencies. Yesterday, the WSJ published a story raising questions on private credit ratings which perfectly illustrated the issues I raised. Below is a summary of these risks: As always comments appreciated Private Credit and Ratings Shopping While all debt instruments are at risk for rating shopping, the risk is greater for private credit as they operate in the shadows, are often not public and need one rating. The NAIC requires one rating for risk-based capital. In Athene’s case, Apollo is both asset originator and Athene’s asset manager, which increases the incentives and ease of rating shopping. In my analysis 50% of Athene’s purchases had an Apollo affiliation - mostly private credit. According to the SEC’s Office of Credit Ratings, Egan Jones (EJR) and KBRA issue most private credit ratings. It’s worth questioning how minor rating agencies dominate private ratings -  easier standards are an obvious culprit. The WSJ focused on EJR and highlighted whistle blower lawsuits alleging an improper ratings process. EJR rates around 21K CUSIPs which appears far beyond what would seem possible given the size of their staff (around 20). By comparison, Fitch rates 21K entities with 1133 analysts. Though these aren’t exactly apples-to-apples, it does raise the concern that EJRs rating process emphasizes profitability over quality. Post financial crisis, ratings regulation is worse, not better. Private Credit, and the increase in # of rating agencies amplify systemic credit risk. Apollo and Athene – Conflicts of interest and ratings Apollo’s ownership of Athene and role as Athene asset manager poses significant conflicts of interest. In my article I highlighted 3 large Apollo affiliated Athene investments that comprised more than 50% of capital - all privately rated. Apollo as originator can shop for the single best rating to maximize Athene’s capital. The largest conflict relates to Athene's purchase of $4B debt in an Intel Chip fabrication business, where Apollo negotiated an $11B purchase. Without Athene's balance sheet this deal doesn't get done. Flawed Ratings of Athene 1) Moody’s awards Athene a AA for the market share component of their rating. This is backwards. Athene’s market share is DIRECTLY a function of asset risk as higher yielding assets enables them to compete better in the annuity and other liability markets (see image). 2) Flawed Asset Risk analysis: RAs rely on ratings assigned by other RAs. Hence Moody’s will accept KBRA, EJR, etc, ratings. If Athene’s investment ratings are inflated, Athene’s own Single-A rating will be inflated.   3) Reliance on Apollo: Moody’s elevates Athene’s credit rating for the financial flexibility component from BB to A based on the false notion that Apollo is a source of strength - Apollo argues the opposite (see image).

My latest for The Wall Street Journal: Ratings that grade private-credit products and are used by investors to categorize debt issued by lending firms are increasingly being called into question by industry decision makers. Credit firms that bundle packages of loans to back securities like collateralized loan obligations, or CLOs, are often able to choose the ratings provider for such issues. Critics say this can lead to conflicts of interest, as the issuer pays fees to the ratings provider while the resulting grades can significantly affect the marketability of the rated securities. The system is similar to students being able to choose which teacher grades their work, according to one private-credit executive with knowledge of the matter. “The only difference is, teachers aren’t getting paid based on giving out A’s,” the executive said. To some, this situation echoes the period leading up to the subprime mortgage market meltdown in 2007, when ratings companies courted issuers of collateralized debt obligations, or CDOs, to maintain a lucrative stream of fees they earned by rating the securities. One ratings agency insider from those days told a subsequent congressional inquiry that losing business to competitors became a source of major concern in his company, and those ratings firms that scored debt conservatively lost market share. https://lnkd.in/eNabSyDq

💡Landmark Win for Investor Protection in India 💡 😎In a first-of-its-kind ruling, the Chandigarh State Consumer Disputes Redressal Commission has held market intermediaries — not just the issuer — liable for investor losses due to a financial default. The case: 🪭 Investor Jyoti Khemka had invested ₹3.42 lakh in DHFL’s secured NCDs. DHFL defaulted in August 2019. But instead of accepting the loss, she took the fight to the consumer court — and won. Who was held responsible? 🅾️ Catalyst Trusteeship Ltd (Debenture Trustee) — failed to secure collateral or monitor DHFL’s deteriorating finances as mandated by SEBI rules. CARE Ratings & BrickWorks Ratings (Credit Rating Agencies) — maintained ‘AAA’ ratings well into 2018–19 despite clear warning signs. The order:🅾️ Catalyst Trusteeship to pay ₹2,04,880 + 9% interest from default date. CARE & BrickWorks fined ₹1 lakh each for “deficient service” and “unfair trade practices.” All three to jointly pay ₹33,000 towards litigation costs. Why this matters: ✅ Shifts accountability — Trustees & rating agencies can no longer hide behind “issuer responsibility.” ✅ Empowers retail investors — Consumer courts are now a viable venue for financial redress beyond SEBI action. ✅ Raises compliance stakes — Fiduciary duties of trustees and accuracy obligations of rating agencies are under sharper scrutiny. This is more than just a win for one investor — it’s a message to the market: If you’re part of the financial ecosystem, you are accountable for the trust investors place in you. Kudos to the consumer court for reinforcing that investor protection is not optional — it’s a duty. Times Network #InvestorProtection #ConsumerRights #FinancialMarkets #SEBI #Investors #CorporateGovernance #Accountability #Judiciary #Finance

The ‘08 crisis proved that rating agencies were broken. Two decades later, the same firms still decide which deals get capital and which don't. Here's the paradox investors never think of: CMBS issuance rose 24% in 2025. Every deal required agencies to assess default risk, estimate loss severity and assign ratings across the capital stack. Those ratings determine: • Who can buy a bond • What spread investors demand • Whether a deal can come to market efficiently Institutional mandates hinge on ratings thresholds. Many funds can’t hold non-investment-grade securities. ETFs and insurers stick to AAA/AA bonds. One rating notch can swing liquidity and pricing. Even borrowers who never access CMBS are indirectly influenced by it. CMBS spreads serve as a reference point for banks and insurance lenders. A downgrade in a specific property type or submarket can signal shifting fundamentals and influence broader debt pricing. But ratings aren’t forecasts. They’re designed to estimate losses under stress scenarios. The Great Financial Crisis revealed the limits of those models. Post-pandemic office disruption exposed them again. CMBS delinquency rates recently hit 12.3%, an all-time high. Yet prices haven't collapsed like 2008. Proof that CMBS is a snapshot of a subset, not the whole market Agencies can't predict every crisis. Still, they remain essential, acting as a shared shorthand that lets capital flow across a fragmented market without every buyer re-underwriting every loan. Borrowers structure deals for stronger ratings and lower costs. Passive capital buys rated paper to meet mandates. Active investors use ratings as inputs, not conclusions. That tension between reliance and skepticism keeps the CRE debt market functioning. We unpack how this system really works, how ratings ripple beyond securitization, and why their direction matters in the current cycle in the latest Thesis Driven letter. Link in the comments.

When credit rating governance slips quietly out of sight... A new Financial Times Alphaville piece by Toby Nangle highlights a troubling pattern in the fast-growing private credit market: https://lnkd.in/erHykn4j (subscription required) Smaller credit rating agencies are rapidly gaining business from insurers by issuing “private letter ratings” - confidential grades used to classify assets for regulatory capital purposes. These ratings are rarely public, lightly scrutinised, and, according to data from the US insurance supervisors, often two to three notches higher than equivalent in-house assessments. In some cases, the same loan moved six notches simply by changing who rated it. For regulators, this looks like competition. For governance, it’s a warning sign. When insurers can shop around for friendlier ratings to lower their capital requirements, we’re back to the same incentive problem that once plagued structured finance. The difference this time is that it’s happening in the shadows of private credit, under fragmented supervision, with no single authority able to see the full picture. The IMF has already flagged the risk of under-capitalised insurers holding assets that only appear investment-grade. The logic is painfully familiar: if everyone’s incentives point toward optimism, systemic fragility follows quietly behind. The lesson? Ratings diversity without oversight is governance drift rather than reform and it deserves heightened attention. The structural realities of the concept of rating credit professionally and organisationally continue to reveal themselves. The Credit Rating Research Initiative #creditratings #privatecredit #insurance #debt #finance #investors