Midroog Sees Black Ink After 6 Months

Six months have past since Israeli credit rating agency Midroog launched its operations, and the company is already profitable, according to chairman Yaakov Laskov.

Midroog is ahead of schedule on its September 2003 business plan, said Laskov, even though he refused to sign off on it when he was recruited. Midroog already controls a third of the market for new companies seeking a rating, said Laskov. He estimates that the projected growth in the extra-bank financing market in Israel is likely to improve even more with the company's financial reports.

"We are still not talking about dividend distribution because we have unfinished business from the past, and as a matter of course a ratings agency tends to be conservative regarding its excess cash. However, in general, we do not need large amounts of cash, and when we have surpluses we will distribute them," said Laskov.

Midroog has released 12 reports to date and has 23 in the works. Report prices range from NIS 100,000-200,000. Laskov refused to comment on Midroog's financial state, but its revenue is estimated in the NIS 3-5 million range over the past half year. Midroog employs about 15 workers.

Laskov estimates that Moody's, the international rating agency, will exercise options for full control of Midroog, barring significant external circumstances. Moody's, which signed an affiliation agreement with Midroog, holds a 10 percent interest in Midroog and serves as a professional model for the company. Moody's can exercise its first option to enlarge its holding to 40 percent for an estimated $1.5 million in another six months. Moody's can obtain full control - 51 percent - by 2006. "I tell my employees all the time that the greatest appreciation of their work will be when Moody's announces its increase in its holdings," said Laskov.

The chairman is satisfied with Midroog's entry into the credit rating system, after years of exclusive control by Maalot. "We introduced several changes to the field, and we also lifted the level of professionalism. One of the changes, for example, was the commitment to timetables. Our average report takes 28 work days. Now I have been informed that Maalot also started commiting to timetables.

Midroog has published two reports so far of companies that have done a double-rating, Bezeq and Adgar. Laskov believes that double-rating will catch on because costs are low to the company involved and the advantages justify the move. He said there is a large company traded in Tel Aviv that is currently working through Moody's on a debt rating in order to make a public offering abroad.

Laskov rejects the market's past attitude that the role of a rating agency is to be a "shield for investors."

"A credit rating agency serves the whole market, and not just a specific player," he said. "We do not take a position. Our goal is to increase transparency between the [bond] issuing company and investors by reducing the asymmetry in information between borrowers and creditors."

An additional common error that investors make is to connect a company's debt rating with equity rating, according to Laskov. "This is an intuitive comparison, but many times there need not be a connection between a company's quality, its capital investment value, and its ability to redeem its debt."

Laskov argues that regulation of institutional bodies is too widespread. He suggests decreasing regulation of investors and instead increasing supervision of rating companies. Research proves that, where states regulate investors less, the returns are much higher, Laskov claims.