1. Jules Kroll is planning to enter the credit ratings business. Is this a good idea? Is this a good time? Why? We suggest it is a good time but not a good idea for Jules Kroll to enter the credit ratings business. In order to know whether it is right for him to do so, we have used SWOT analysis to see the feasibility of this plan.
Strength Jules B. Kroll — the leader of Kroll Bond Rating Agency, is the formidable strength for them to enter this new industry by his successful business career and abundant experience as an entrepreneur. Few people ever penetrate the dark side of money, but Jules Kroll is one of them. He has done all his life to look under the covers. The previous success and reputation of the Kroll corporate intelligence firm and K2 Global Partners can help Kroll Bond Rating Agency stepping into spotlight, while give public confidence that Jules Kroll could break into such a tough industry.
Weakness Credit rating business is brand new field to Jules Kroll. He must do a lot of preparations to meet the requirements — a large amount of qualified experts, which would be a key to success; interest from users and issuers; NRSRO designation; investors who can help developing the financial viability of the project. Startup companies lack the geographical reach and industry expertise of the established players. It is costly and time consuming to recruit prominent staff of credit rating industry, and it is also hard for Kroll to attract users and issuers since majority of them have already worked with the big three rating agency for many years. Moreover, applying for NRSRO status is a slow and expensive process.
Opportunity The poor performances and overly optimistic ratings of the big three rating agencies during the recent financial crisis have made them been called “essential cogs in the wheel of financial destruction”. It is certainly an uncomfortable time for incumbent ratings agencies, big or small. Wall Street types tend to look askance at credit ratings no matter who is providing them. But ratings services, despite their apparent failures, still play a crucial role in the capital markets. So it is also
attractive for Jules Kroll to take this opportunity to enter the credit rating industry. In addition, the “issuer pays” model, which used by the big three rating agencies, lets companies shop around for the best ratings, putting pressure on the agencies to inflate their grades. As a result, it is very difficult to argue that they can adequately represent the users’ side. Therefore, Jules Kroll wants to use another model that can assign unbiased and reliable ratings.
Threat The leading ratings agencies, Moody’s, Standard & Poor’s and Fitch — a triumvirate some liken to an oligopoly, almost dominate the whole market. Their long history operations, great reputation and customers’ loyalty in the industry lead them incomparable to new entrants. Furthermore, Kroll also faces competition from new entrants like Meredith Whitney, a banking analyst who is getting into the ratings business, and Morningstar, of mutual fund fame, and the Chinese municipal rating agency Dagong with huge capital. Therefore, it is tough for Kroll to break into this new industry where the three dominant incumbents have 97% of all ratings.
In conclusion, we could say it is a good time for Kroll to enter credit rating business since the big three agencies lost considerable investor confidence during the financial crisis, and that the sector is ripe for new blood. However, based on our SWOT analysis, we don’t think it is a good idea because of Kroll’s weakness and competitors’ threat.