Case: Kroll Bond Rating Agency (5-212-065)

1. Jules Kroll entering the credit rating business at the moment is not a good idea but the timing for him entering the business is a good time. It is a good time because the credibility of rating businesses is low due to the businesses issuing “overly optimistic ratings” therefore the opportunity to gain credibility back in the credit rating industry is at an all time high and Mr. Kroll’s agency could solve some of these issues with his strategies. However, it is not a good idea that Mr. Kroll enter the credit rating business is a new field to Mr. Kroll. In addition to it being a new field, Mr. Kroll’s main focus was not entering the credit rating field due to him working on other venture capital projects and charity endeavors. In order to make this new business a success he needs to step away from his other ventures at the moment and focus on the highly sensitive credit rating business. It may also not be a good idea because it would be difficult for the firm to become competitive in a short amount of time.

1. The incumbent credit raters failed in the financial crisis because they were issuing overly optimistic ratings, and these ratings were false. Creditworthiness is very sensitive and accuracy is important therefore this was a tremendous issue in the financial crisis. Sensitivity was elevated at this time, and the raters did nothing to keep their credibility intact. This affects Kroll’s opportunity in a good way because they have an opportunity to enter the credit rating business as a new and fresh rating agency with a clean reputation. With new changes proposed by Congress to require rating agencies to provide annual reports on t heir internal controls, to disclose data and assumptions underlying credit ratings as well as methodologist used and to disclose performance statistics for ratings, Kroll should be able to embrace some of these new requirements due to some of his other former businesses already having these strict guidelines given by the SEC.

1. The NPV of KBRA plans is a positive341.1 Million dollars

1. If Kroll goes ahead with their plans the best way to enter the ratings business is to properly staff which will allow KBRA to properly compete within the industry, these people will also be credible because they will be highly qualified and they should not be adjusting ratings just to receive revenue – their staff would be highly qualified and also should partake in ethics training courses which discuss the financial crisis and the history of credit rating firms. They should also consider becoming an NRSRO which would be expensive and therefore they should reach out to investors who could help their firm fund this. An NRSRO status would help the firm keep business many years down the road. However, they would need to develop a list of clientele and operate for three years before application.

Appendix

Exhibit 5 – Financial Projections KBRA – Page 13, Kroll Bond Rating Agency, Bo Becker, 2013