The DBRS offices on University Ave. in Toronto.Fred Lum/The Globe and Mail
DBRS Ltd. is ushering in a new era of international expansion as a big-money consortium takes over.
Private equity firms Carlyle Group LP and Warburg Pincus LLC said Monday that they would acquire the Canadian rating agency, with plans to invest in growing the business.
Toronto-based DBRS settled on Carlyle and Warburg Pincus after months of hunting for the right buyer for the agency, which began business almost four decades ago as Dominion Bond Rating Service.
Terms of the deal were not disclosed, but the transaction is reportedly worth about $500-million (U.S.), and is expected to close in February or March next year. The U.S.-based investment firms intend to keep the company's headquarters in Toronto.
DBRS is the world's fourth-biggest ratings agency, a business that makes most of its money by charging debt issuers fees to judge their ability pay their debts and the risk of default. While the company is still small on the world stage, with a market share of about 2 per cent in a sector dominated by Moody's Investors Service Inc., Standard & Poor's Corp. and Fitch Ratings Inc., its clout is growing.
And Carlyle and Warburg Pincus, which sources said have now signed a deal with DBRS, would only add to that.
DBRS now rates more than 1,000 companies and other groups that issue debt. It's one of the four agencies used by the European Central Bank, which adds to its foreign presence.
DBRS is involved in ratings from corporate to sovereign issuers. With more than 325 employees, it has been growing, having expanded into the United States in 2003, with offices now in New York and Chicago. It also re-established a regional office in London in 2010, and now boasts between 65 and 75 staff there, as Europe became its fastest-growing market.
DBRS is increasingly churning out ratings in Spain and Italy. Indeed, it will issue sovereign credit reports on Italy in March, and then Spain in April.
Olivier Sarkozy, head of the financial services team at Carlyle said the company would "continue the build out of the DBRS platform on a global basis."
"The world needs more global ratings franchises that issuers and investors alike can count on to provide timely and insightful ratings on a consistent and impartial basis. As the world's fourth largest agency we believe DBRS is ideally suited to fill that void," Mr. Sarkozy said.
Walter Schroeder, who formed the business in 1976, hired New York investment bank Perella Weinberg Partners LP to study the company's options this summer, described at the time as part of an estate-planning process. He will retain a a stake in the business as an investment partner.
"While our Canadian franchise and culture will continue to be at the core of DBRS' operations, the breadth and depth of both Warburg Pincus and Carlyle's international presence will be invaluable to DBRS at it seeks to capitalize upon its growing platforms in the United States and Europe," said Mr. Schroeder, in a statement.
Mr. Schroeder passed the role of chief executive on to his son David in 2008, and Daniel Curry took the helm a year ago. Mr. Curry joined the firm in 2008, from Moody's, where he had worked as a managing director, bringing international experience overseeing ratings and research of companies with both investment-grade and high-yield status.
"DBRS is well positioned to strengthen our leading franchise in Canada and continue to develop our presence across North America and Europe," Mr. Curry said.
The search also came as DBRS moved further away from struggles stemming from the financial crisis.
DBRS took a hit in 2007 as $33-billion in highly rated third-party asset-backed commercial paper froze up during the credit crisis. After the global meltdown, major agencies came under fire for not detecting the potential risks or issuing debt downgrades soon enough.
Rating agencies have since adapted to new regulations, such as U.S. changes that ramp up disclosure rules, and Canadian moves to approve "designated rating organizations," including a formal code of conduct.
The agencies remain an integral part of the financial system, with ratings required by regulators in some cases, and many other financial groups relying on the ratings to make investments and report risks to stakeholders.