Citrus Club Downtown
November 20, 2013
James H. Gellert, Chairman and CEO
@JamesHGellert, @RapidRatings

What we’ll cover
A GENDA
• Ratings – how we got here
• What’s happened to the industry?
• How it is changing (or not)?
• Competition
• Approaching things differently – Rapid Ratings
• Efficacy, case studies
• Immediate capital markets’ importance
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What’s With This Industry?
B RIEF H ISTORY
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B RIEF H ISTORY
What’s With This Industry?
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Fitch 1923; Moody’s 1900; Standard & Poor’s 1906 and 1860
Rating ability to pay back debt, default probability and loss given default
Was “subscriber-paid,” then turned to “issuer-paid” in the 1970s
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To help investors. But they are most particularly a help to issuers
Myriad problems result
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Senate :
 2002, 2005, 2006, 2009
House of Representatives:
 2007, 2008, 2009 , 2011 , 2012
SEC:
 2002, 2003, 2008 , 2009 , 2013
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Problems and Solutions(?)
Many problems, not many solutions
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Institutionalized, embedded in regulation and in practice
Arbitraged, manipulated, encouraged
Incumbents have had ethical and procedural lapses
Standards abandoned for commercial objectives
Incumbents creatively inhibit competition
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2006 Credit Rating Agency Reform Act - Nationally Recognized Statistical
Ratings Organizations (“NRSRO”)
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Dodd-Frank’s ratings language
 939A, Franken Amendment
But… NRSRO codification, protection of the incumbents, window dressing, competition-hindering requirements, admin and compliance burdens, increased legal liability
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I RONY OR H YPOCRISY ?
Department of Justice
Office of Public Affairs
FOR IMMEDIATE RELEASE
Tuesday, February 5, 2013
Department of Justice Sues Standard & Poor’s for Fraud in Rating
Mortgage-Backed Securities in the Years Leading Up to the Financial Crisis
Complaint Alleges that S&P Lied About its Objectivity and Independence And Issued
Inflated Ratings for Certain Structured Debt Securities.
• Joined by 16 states: AZ, AR, CA, CO, CT, DE, DC, ID, IL, IA, ME, MS, MO, NC, PA, TN
& WA (and NJ followed recently)
• BUT CA, CO, IA, PA, TN, NJ all mandate the use of S&P; e.g.:
“ From the most general perspective, 88 percent of the total fixed income portfolio must be invested in investment grade securities.
Investment-grade securities are those fixed income securities with a Moody’s rating of Aaa to Baa or a Standard & Poor’s rating of AAA to BBB.
Each portfolio is required to maintain a specified risk level.
” *
*http://www.calpers.ca.gov/eip-docs/about/pubs/cafr-2012.pdf; page 5 6

C OMPETITION
T HE B IG T HREE P LUS
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10 NRSROs after 2006 CRA Reform Act
How many now?
10
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Issuer-paid, user-paid, investor-owned, public utility, and others
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Replicate the traditional model
Approach differently
Structured products are the most different of all
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R APID R ATINGS
D IFFERENT B USINESS M ODEL , N EW P ERSPECTIVE
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User-paid, not issuer-paid
Independent, quantitative, scalable, timely
Three years earlier than Moody’s
Debt issuers and non-debt issuers rated
Financials only, no management input, no market signals
• Financial Health Ratings
• Non reductionist approach
• Wide variety of performance measures
Public & private companies globally rated on apples-to-apples bases
Currently rating:
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• 12,000 public firms globally, and growing
10,000 private firms for clients on a confidential basis, and growing
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F INANCIAL S ERVICES S EGMENT
Lenders’ credit decisions and oversight
Credit & equity risk management
Credit & equity investing
Insurance underwriting
Assessing CLOs
Traditional
Ratings
Broker/dealer trading
M&A analysis
Indexing
Corporate Risk
Vendor risk management
Commercial tenant risk assessments
Single name, sector & portfolio analysis
Fiduciary & regulatory oversight
B USINESS S EGMENTS AND U SES
C ORPORATE S ERVICES S EGMENT
Enterprise risk management
Investment portfolios
Research
Counterparty risk
A/R management
Portfolio
Analytics New customer evaluation
Acquisition due diligence
Supply chain risk management
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P ERFORMANCE VS . D EFAULT
Through the Financial Crisis ’ High Volatility, FHRs Continued to Perform
Exceptionally Well as Predictors of Corporate Health and Failure
US Industrial Defaulters, 1991 to 2012
80
70
60
50
40
30
20
10 FHR 8
0
0 10
FHR 18
20 30
FHR 79
Very High Risk
0 to 19
High Risk
20 to 39
40 50
FHR
Medium Risk
40 to 59
60 70
Moderate Risk
60 to 79
80 90
Low Risk
80 to 100
100
At default…
25 was the average FHR
90% of firms were High Risk or below
99% were below investment grade
66% were consistently rated High
Risk or Very High Risk for at least 18 months prior
33% experienced a significant downgrade of 10 or more points in the
18 month period prior
Red shows 1,124 industrials under coverage that defaulted or filed for bankruptcy.
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P ERFORMANCE VS . E QUITIES
E NHANCED R ETURNS
Rapid Ratings constructed a blue-chip portfolio and evaluated its performance using FHRs against a broad equity index (the S&P 500) to determine our performance. Result:
2012
RRI Low Volatility Portfolio 13.62%
S&P 500 13.41%
Difference .21%
3-year
31.63%
27.90%
3.73%
10-year
101.85%
62.10%
39.75%
2000 – 2012
73.73%
-2.93%
76.66%
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CFA TEST
MF G
R APID R ATINGS GAVE MORE THAN 2 YEARS OF EARLY WARNING
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Rapid Ratings’ FHR on Twitter is 19.
Facebook was rated 73 at IPO, and
LinkedIn 69.
To understand Twitter’s IPO, we created an IPO profile to match it against Bubble-era companies versus contemporary IPOs.
Twitter’s profile more closely matches the IPOs of the 1997-2000 period than any time since, making Twitter indeed a Bubble-era type IPO.
T WITTER
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“ The rating continues to depict a Very High Risk credit profile as overall profitability, debt service management, cost structure and sales performance are at low levels relative to the global data set.
“ The bottom line: Notwithstanding the recent upgrade, Patriot Coal Corp is situated in our Very
High Risk group, displays weakness in four of our six performance categories and demonstrates significant underperformance in ROCE. This suggests that to those for whom Patriot Coal Corp represents an existing exposure, such exposure should be very closely monitored. For those considering Patriot Coal Corp as a new or increased exposure, great caution is needed.
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I NDIVIDUAL C OMPANY A NALYSIS
FHR R EPORT
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Bond Market – Maturity Wall
US H IGH Y IELD C OMPARISON G RAPH , Q4'09 TO P RESENT
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L EV L OANS : M ATURITY W ALL
L EVERAGED L OANS I NDEX M ATURITY P ROFILE ($ MN )
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S UMMARY
A N I NDUSTRY IN N EED OF C HANGE
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More competition is needed and awareness of unintended consequences
More access to data/information
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Less focus on administration/compliance
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Less focus on legal liability
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C ONTACT D ETAILS
James H. Gellert
Chairman and CEO
Rapid Ratings International Inc.
86 Chambers Street, Suite 701
New York, NY 10007
Tel: 646-233-4600 gellert@rapidratings.com
@JamesHGellert, @RapidRatings
Disclaimer: A Financial Health Rating (FHR™) or equity recommendation from Rapid Ratings™ is not a recommendation or opinion that is intended to substitute for a financial adviser's or investor's independent assessment of whether to buy, sell or hold any financial products. The FHR™ is a statement of opinion derived objectively through our software from public information about the relevant entity. This information and the related FHR’s™ and related analysis provided in the reports by Rapid Ratings™ do not represent an offer to trade in securities. The research information contained therein is an objective and independent reference source, which should be used in conjunction with other information in forming the basis for an investment decision.
Rapid Ratings™ believes that all of its reports are based on reliable data and information, but Rapid Ratings™ has not verified this or obtained an independent verification to this effect. Rapid Ratings™ provides no guarantee with respect to the accuracy or completeness of the data relied upon, nor the conclusions derived from the data. Each FHR™ is a relative, probabilistic assessment of the credit risk of the relevant entity and its potential to meet financial obligations. It is not a statement that default will or will not occur given that circumstances change and management can adopt new strategies.
Reports have been prepared at the request of, and for the purpose of, the subscribers to our service only, and neither Rapid Ratings™ nor any of our employees accept any responsibility on any ground whatsoever, including liability in negligence, to any other person. Finally, Rapid Ratings™ and its employees accept no liability whatsoever for any direct, indirect or consequential loss of any kind arising from the use of its ratings and rating research in any way whatsoever, unless Rapid Ratings™ is negligent in misinterpreting or manipulating the data, in which case, our maximum liability to our client is the amount of our fee for the report.
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