fFor the Berlin-based rating agency Scope, the mandate for the bonds of the European Union (EU) is important progress on the way to breaking into the oligopoly of the three major American providers S&P Global, Moody’s and Fitch. On Thursday, the European Commission gave the first European rating agency the mandate to rate EU bonds according to their creditworthiness in future. According to Johannes Hahn, Commissioner for Budget and Administration, she wants to set an example for more competition on the rating market. Florian Schoeller, CEO and founder of Scope, spoke of a milestone. The EU mandate should give his company a tailwind in the European Central Bank’s (ECB) recognition process, which has been ongoing since the beginning of the year.
That’s why a second rating agency based in Germany applied alongside Scope with Creditreform Rating. So far, the ECB has recognized four rating agencies: in addition to the three big ones, the Canadian DBRS. The ratings are only really valuable if they are recognized by the ECB. These are crucial when banks submit securities as collateral for ECB financing transactions. The higher their rating, the higher their loan-to-value ratio. The lower the credit quality, the greater the safety margin. In addition, the ECB has aligned its bond purchase programs, which expire at the end of June, with the ratings. These are likely to continue to play a role in the reinvestment of maturing debt instruments.
Issuers or debt instruments must be rated investment grade by at least one of the agencies. This investment-worthy range starts with the grades “BBB-” (S&P, Fitch) or “Baa3” (Moody’s). Ratings from S&P, Moody’s and Fitch are known around the world, adding to their value. They also charge a level of fees that small agencies can only dream of. European providers hardly play a role in the market, since S&P, Moody’s and Fitch control the market in Europe with more than 90 percent.
That is why politics and business have been calling for more competition on the rating market for a long time. Dependence on the three American rating agencies was particularly lamented during the euro sovereign debt crisis. However, their great market power helps when unpleasant decisions have to be made, such as in the assessment of highly indebted countries. Large rating agencies are in a better position here to uphold rating judgments that have been criticized in public. In August 2011, for example, S&P withdrew the “AAA” rating from the United States because of its national debt. The world’s largest economy has only been rated “AA+” by the market leader at the second highest rating level.
Axa becomes a new shareholder
With the EU, which is also rated “AA+” by S&P but is rated “Aaa” by Moody’s at the highest level, Scope has been mandated by a new heavyweight in the European bond market. Under the Corona programs NextGenerationEU and SURE, the Commission has issued bonds worth 220 billion euros since October 2020 on behalf of the international community. A total of around 900 billion euros is to be raised by the end of 2026, of which 806 billion euros for the reconstruction fund decided during the Corona crisis. 30 percent or around 250 billion euros are to be covered by green bonds. The EU is thus preparing to become the largest issuer of green bonds in the world.
With the French insurance group Axa, Scope has now gained another strategic shareholder, which is committed to a European rating agency. Insurers such as Signal-Iduna and HDI Kapital as well as the RAG Foundation are already involved in Scope. Scope is controlled by founder Schoeller, BMW major shareholder Stefan Quandt and a foundation that has prominent members in the form of former Federal President Horst Köhler and former ECB President Jean-Claude Trichet.