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New fees mean more conflicts of interest for rating agencies
By Sharon Shpurer

Securities rating agencies in Israel and around the world have been roundly criticized over the past year and a half for their role in the global economic crisis. According to claims, they could not rate companies objectively due to their inherent conflicts of interest - companies pay the rating agencies to rate them, and as a result, the rating agencies have an incentive to provide favorable ratings.

Rating agencies can charge as much as NIS 500,000 to rate a bond series. Since the Israel agency Maalot merged with the global securities rating company S&P, it has changed its fee model. It is now charging based on the size of the financing round - 0.03% of the sum raised by a company, in addition to a one-time fixed fee of around NIS 160,000, plus about NIS 50,000 a year for ongoing monitoring.
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This means that the more successful the stock or bond issue, and the more money a company raises, the more fees Maalot gets. The problem is that a successful issue depends on a high rating from Maalot. Thus, if a company is planning a NIS 1 billion bond issue, as Cellcom Communications and Makhteshim Agan recently did, Maalot would draw a NIS 300,000 fee. Smaller issues of NIS 100 million carry a fee of NIS 30,000.

Even before the merger with S&P, Maalot's fees were based on the amount of money raised, but were calculated differently.

The idea behind charging based on the sum raised is that the more money a company raises, the greater the value of the rating for the company. Still, the amount of work required for rating a bond series does not change with the size of the issue.
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