This morning, December 13, 2021, the @WSJ posted this article: Parthenon Capital to Buy Kroll Bond Rating Agency in $900 Million Deal. Given my recent blogpost on the debt ratings industry, I thought it would be interesting to delve a bit into this announcement. @WSJ has a good series of articles reviewing the history of KBRA.
Kroll background
The source of this detail is from a @WSJ article from September 4, 2010. There is also some detail about Jules Kroll on this Wiki page. A very brief summary is that he was born in 1941 in Queens, attended Cornell and Georgetown, worked as an ADA in NYC, and then built Kroll, Inc. which grew in prestige and impact, which he sold to Marsh & McLennan for USD $1.9 billion in 2004. In 2009, two new ventures were created by Jules Kroll: KBRA and K2 Intelligence. I thought this quote from the 9/4/10 article was interesting about his views of how to create value in the bond ratings business:
Mr. Kroll says he will use computer models like the ratings giants do, but he will also add some old-fashioned detective and auditor work to spot-check borrowers, investigate mortgage companies and verify issuer claims. He says that most of the information required to “do a Kroll” is already in the documents generated by Wall Street. “I’m not going to do some esoteric regression analysis that no one’s ever heard of before. I’m going to do basic meat-and-potatoes stuff.”
‘Where There’s Corruption, There’s Opportunity’
The man who took on Saddam and Marcos is trying to break up the Big Three credit-ratings cartel. Can he pull it off?
By James Freeman: WSJ, 9/4/2010
One of the priorities identified by Kroll as opportunities to generate value, according to the 9/4/10 article, included leveraging the networks of investors, such Bessemer Venture Partners, to generate demand for these ratings, particularly asset-backed securities. Other focus areas included targeting an overlooked market, regional community banks, as well as an alternative payment model (i.e. investor-paid rather than issuer-paid.)
In another @WSJ article from August 25, 2014, indicated that, “Kroll sees the market as a potentially sizable niche, given that there are about 1,000 banks holding assets between $1 billion to $10 billion.”
To become a competitive threat to the Big Three and force them to change their methods, Mr. Kroll figures his firm needs to rate 50 deals in the next two years. “If we gain traction, they will copy us,” Mr. Kroll says.
‘Where There’s Corruption, There’s Opportunity’
The man who took on Saddam and Marcos is trying to break up the Big Three credit-ratings cartel. Can he pull it off?
By James Freeman: WSJ, 9/4/2010
Wharf Street investment
The source of this detail is from a @WSJ article from November 3, 2015. This article included Wharf Street joining Carlyle and Warburg Pincus as PE firms in the space: the latter firms joined to acquire DBRS from Canada earlier that year. At the time of this article, Kroll was reported to have 170 employees and was valued at USD $300+ million. The firm was able to grow, despite determining that, per the August 25, 2014 article, “the company ended up going with the conventional payment model.”
Growth
The source of this detail is from a @WSJ article from February 9, 2017. In this article, it is reported that the firm employed 230 employees, recorded USD $75 million during 2016, and was expecting to grow to USD $100 million during 2017. It indicated that, while the biggest firms rated more than 95% of all bonds, there were exceptions in certain niches.
In 2016, Kroll rated 18% of structured finance bonds that were issued in the U.S. with credit ratings, according to trade publication Asset-Backed Alert. Moody’s and Fitch each rated close to half the structured bonds issued. Many securities carry ratings from multiple firms.
Jules Kroll to Step Down as CEO of Namesake Credit-Rating Firm
Former private investigator founded firm in 2010 in an attempt to challenge the large bond raters
By Serena Ng: WSJ, 2/9/2017
Some analysis
The source for this detail is from @WSJ article from this morning, December 13, 2021.
The deal, which is expected to be announced later Monday, values KBRA at $900 million including debt…
KBRA now has more than 400 employees across its five offices in the U.S. and Europe and has issued over 51,000 ratings, amounting to nearly $3 trillion in issuance.
Parthenon Capital to Buy Kroll Bond Rating Agency in $900 Million Deal
While sales of credit-ratings firms are relatively uncommon, this is the second in recent years
By Miriam Gottfreid: WSJ, 12/13/2021
I wonder, what does this mean in terms of valuation of a debt ratings agency? Well, based upon some of the details above: if KBRA had USD $75mm-$100mm on 230 employees, it was recognizing approximately $326k-$434k revenue per employee per year. (I imagine the “true” value is closer to the former, as staffing likely ran up; It is notable, to me, that the firm publicized a planned growth rate of 33% for 2017 compared to 2016.)
Another back of the envelope calculation: In 2015 the firm was estimated to be worth USD $300+ million based upon revenues generated by 170 employees, but revenue wasn’t reported. This leads to an approximate EV per employee of USD $1.8 million and, if the revenue per employee was at the ~$326k level, revenue could have run at approximately USD $55 million. That seems roughly in line with the trends inferred from the other data points, such as the reported USD $75 million for 2016, which would constitute a robust 36% growth rate.)
If this analysis holds for 2021, revenue could be approximately USD $130 million, though the reported value for the deal (USD $900 million) is greater than $1.8 million per employee (1.8million x 400 employees = USD $706 million). I wonder how this compares to comps under Moody’s Investor Services (MIS) per their most recent 10Q:
I posted some values below to compare against KBRA reported values. Some comparisons won’t really make sense, of course, as KBRA is a “pure play” ratings agency while, at a high level, Moody’s also has material revenues from other services (i.e. MA.) I wonder if the revenue and EV per employee values I came up with above seem in a reasonable ball-park…
| Item | 9/30/21 | 9/30/20 | Delta | Comments |
| Employees, MIS | 5,062 | 5,066 | -0.08% | |
| Revenue, MIS, mrq | $967 million | $863 million | 12.05% | |
| Revenue per ee, MIS | $764,125 | $681,405 | 12.14% | Annualized |
| Adj OpInc, MIS | $580 million | $554 million | 4.69% | |
| Adj Operating Margin, MIS | 59.98% | 64.19% | Ref. Page 58 of 10Q | |
| Total employees | 13,023 | 11,397 | 14.27% | |
| Total revenue, mrq | $1,526 million | $1,356 million | ||
| Revenue per ee | $468,709 | $475,915 | -1.51% | Annualized |
| EV | $79,650 million | Per YahooFinance on 12/13/21 @ 12:06pm | ||
| EV / ee | $6,116,102 | N/a | N/a |
This transaction, and the story of Jules Kroll and KBRA, cause me to view this NRSRO category as a really interesting space!
Congratulations to the entire team at KBRA and the shareholders. And thank you for reading my blog! If you read this and have immediate reactions to my analysis, please reach out to me!