Shareholding Provisions in European Credit Rating Agency Regulation

The European Regulation on Credit Rating Agencies (as amended) contains rules applicable to Moody’s Investors Service (MIS), which prohibit it from providing credit ratings and/or require disclosures to be made in certain circumstances where there are relationships between rated issuers and the significant shareholders of MIS’s parent company, Moody’s Corporation (MCO).

Further, in order for MIS to be able to endorse non-EU credit ratings into the EU, its non-EU CRAs have to follow policies and procedures “at least as stringent as” those in the EU. The European credit rating agency regulator, ESMA, has issued guidelines on endorsement in July 2018, explaining how these rules should be applied outside the EU in order to be deemed “at least as stringent as” the EU rules. The endorsement of non-EU credit ratings in the EU allows those credit ratings to be used in the EU for regulatory purposes. The following summarises the impact on MIS’s credit ratings in the EU and outside the EU.

Impact in relation to credit ratings issued by MIS EU CRAs (including their branches)

In respect of credit ratings issued by MIS entities where the lead analyst is located in the EU (including their branches), these provisions may affect:

    • MCO controlling shareholders, holders of 10% or more of MCO stock and their 10% or more holdings or board seats in other companies.
    • MIS EU CRAs may not issue new credit ratings in respect of any MCO controlling shareholder or MCO 10% plus shareholder. In relation to existing ratings, MIS EU CRAs must make a disclosure and consider whether to withdraw or take other action in relation to such ratings; and
    • MIS EU CRAs may not issue new credit ratings in respect of any of the MCO 10% plus shareholder’s holdings of 10% plus, or the controlling shareholder of such holdings, or where the MCO 10% plus shareholder has directors on the board of an entity or any of its controlling shareholders. In relation to existing credit ratings in such situations, MIS EU CRAs must make a disclosure and consider whether to withdraw or take other action in relation to such credit ratings.
    • Holders of 5% or more of MCO stock and their 5% or more holdings or board seats in other companies.
    • MIS EU CRAs may rate holders of 5% plus (but below 10%) of MCO stock without making a disclosure; but
    • MIS EU CRAs must make a disclosure if any of the MCO 5% plus shareholders hold more than 5% of the relevant rated entity or their controlling shareholders, or where the 5% plus shareholder has board members of the rated entity or any of its controlling shareholders.
    • MCO 5% plus shareholders are prohibited from providing advisory or consulting services to a rated entity or its related third party. This includes advisory or consulting services in relation to corporate or legal structure, assets, liabilities or activities; and
    • MCO 5% plus shareholders are prohibited from being able to hold 5% or more or have board members of another EU registered CRA.

As mentioned above, these rules only affect credit ratings issued by MIS entities where the lead analyst is located in the EU (including their branches).

Impact in relation to credit ratings issued by MIS non-EU CRAs (including their branches)

As referred to above, in order for MIS to be able to endorse non-EU credit ratings into the EU, MIS non-EU CRAs have to follow policies and procedures “at least as stringent as” those in the EU. The European credit rating agency regulator, ESMA, has issued guidelines on endorsement in July 2018, explaining how these rules should be applied outside the EU in order to be deemed “at least as stringent as” the EU rules. In respect of credit ratings issued by MIS entities where the lead analyst is located in an MIS non-EU CRA, and which MIS seeks to endorse, these provisions may affect:

    • MCO controlling shareholders and the holdings of 10% or more or board seats of MCO 20% plus shareholders
    • MIS non-EU CRAs may not issue new credit ratings in respect of any MCO controlling shareholder. In relation to existing ratings, MIS non-EU CRAs must make a disclosure and consider whether to withdraw or take other action in relation to such ratings; and
    • MIS non-EU CRAs may not issue new credit ratings in respect of any of the MCO 20% plus shareholder’s holdings of 10% plus, or the controlling shareholder of such holdings, or where the MCO 20% plus shareholder has directors on the board of an entity or any of its controlling shareholders. In relation to existing credit ratings in such situations, MIS non-EU CRAs must make a disclosure and consider whether to withdraw or take other action in relation to such credit ratings.
    • Holders of 10% or more of MCO stock and their 10% or more holdings or board seats in other companies.
    • MIS non-EU CRAs may rate holders of 10% plus (but below 20%) of MCO stock without making a disclosure; but
    • MIS non-EU CRAs must make a disclosure if any of the MCO 10% plus shareholders hold more than 10% of the relevant rated entity or their controlling shareholders, or where the 10% plus shareholder has board members of the rated entity or any of its controlling shareholders.
    • Holders of 5% or more of MCO stock.
    • MCO 5% plus shareholders are prohibited from providing advisory or consulting services to a rated entity or its related third party. This includes advisory or consulting services in relation to corporate or legal structure, assets, liabilities or activities.

As mentioned above, these rules only affect credit ratings issued by MIS entities where the lead analyst is located in an MIS CRA outside the EU (including their branches), and which MIS wishes to endorse.

IMPORTANT NOTE: The above is only a high level summary of the relevant provisions to give a brief outline of potentially impacted parties. Moody’s cannot provide legal or regulatory advice or guidance on these issues but wishes to draw attention to these provisions. Those who think that they may be affected should consult the actual legislation and obtain independent legal advice. The relevant legislation can currently be found on the official website of the EU, www.europa.eu.