he safari lover poached for China’s credit rating charge; Mauro Alfonso hopes Dagong will rival S&P, Fitch and Moody’s

January 29, 2014 5:02 pm

The safari lover poached for China’s credit rating charge

By Christopher Thompson

Mauro Alfonso is a curious choice to help lead China’s transition from low-cost manufacturing to global high finance. The Italian safari enthusiast, who did not speak Mandarin, left a comfortable directorship at one of the world’s big credit rating agencies for a then unknown Chinese start-up in 2012.

Mr Alfonso compares the decision to become head of Dagong Europe to his penchant for travelling through the African bush in 4×4 jeeps. “I like to explore,” he says.

The bespectacled manager, who has a soft-spoken but direct demeanour, left his job at Fitch, the US-based rating agency, following a visit to Beijing in mid-2012. It was his first visit to China. In his new role he is leading China’s international challenge to the “Big Three” – industry shorthand for Standard & Poor’s, Fitch and Moody’s, which dominate global credit ratings.

Mr Alfonso says the Chinese investors that Dagong Europe is targeting initially are still learning about the credit rating business. “In China ratings is a relatively new industry and they need to have someone that they trust in this learning process.”

The importance of rating agencies in the global financial system belies their bland business description. They evaluate credit risk – the risk of a lender losing some or all of their money. Such judgments ultimately help determine the cost of credit for mortgages, car loans and credit cards.

The industry became best known in the financial crisis – for the wrong reasons. It was widely blamed for assigning overly optimistic ratings to securities whose sudden and precipitous loss of value during the crisis led to a scrambled downgrade, further undermining market confidence and helping trigger the collapse of Lehman Brothers, the US investment bank. The agencies’ reputations have not fully recovered.

Enter Dagong Europe’s parent, Dagong Global, which spotted a gap in the market for a rating agency unscarred by the crisis. Dagong Global’s president and chief executive, Guan Jianzhong, has publicly accused the Big Three of failing to disclose risks and being “politicised and highly ideological”.

The Big Three reject that charge, saying they have learnt from mistakes. Harold “Terry” McGraw III, chairman of McGraw Hill Financial, which owns S&P, said that the company would emerge “bigger, better and stronger” because of the crisis.

Mr Alfonso’s criticism is more measured. “We believe that when the markets were going up, probably ratings were too optimistic, and when markets started going down, probably ratings were too conservative,” he says.

“Ratings have been very pro-cyclical but we believe they have to be neutral. Probably we need to be a little bit more conservative when everybody’s happy, and we need to be a little bit less conservative when everybody is too conservative.”

For a nation whose grand projects conjure up visions of vast scale and outlay, Dagong Europe’s beginnings in April 2012 were comparatively meek: a basement in a Milan office block used for storage by the private equity group upstairs.

The company’s business strategy is similarly low-key. In a swipe at the mass-market outlook of the Big Three, Mr Alfonso said Milan-based Dagong Europe is restricting its initial focus to about 300 European companies and financial institutions. That said, the upstart is only a fraction of the size of its main rivals.

“We bring a selective list of names of issuers to the attention of investors, initially Chinese investors,” he says. “If you look at the big incumbents they produce thousands of ratings every day – they are mass production machines [and] it’s quite difficult to have high quality at the same time.” Yet the Big Three’s output reflects the fact that they serve hundreds of thousands of investors.

Dagong Europe’s principal difference is what it calls its “Chinese approach” to investing, meaning an investment horizon of a decade or longer. “The big three incumbents, they have an Anglo-Saxon culture, an Anglo-Saxon approach,” says Mr Alfonso, arguing that their judgment is too influenced by short-term events. “We think that they don’t serve yet a long-term approach – for Chinese people long-term is 10-15 years,” he adds.

The company is 40 per cent owned by Mandarin Partners, a private equity company whose principal investors are the state-owned China Development Bank and Italy’sIntesa Sanpaolo

bank. The rest is owned by Dagong Global, one of the oldest and biggest of China’s domestic rating agencies, which was set up by the government in the 1990s as a stepping stone for the country’s shift to a more market-driven economy.

The company’s Chinese approach raises another question, though – how independent is it from Beijing?

“Analysts are completely independent . . . this is guaranteed by the [European] regulator,” says Mr Alfonso. “Having a Chinese shareholder is a strategic point for us . . . we have much easier access to Chinese institutional investors.”

Mr Alfonso says all Dagong Europe’s analysis is done in Milan before being translated in China. It employs 15 staff from nine countries, all of them poached from the Big Three. Each analyst is responsible for up to 15 issuers, with ratings produced in English and Mandarin.

The establishment of the first international Chinese rating agency comes as record amounts of Chinese investment are flowing into Europe as the country seeks to diversify away from its enormous exposure to assets denominated in US dollars.

In turn European politicians regularly travel east in the hope of channelling the Dragon’s largesse into their lacklustre economies.

“Chinese investors are switching a huge portion of their assets from the US dollar into different currencies and the top focus is on European issuers,” says Mr Alfonso. “Not only the euro but also the pound, the Swiss franc, the Norwegian krone – and they like to have someone from their perspective to look at those issuers.”

Past efforts by Chinese companies to challenge western incumbents have had mixed success. In the world of accounting – another industry dominated by a handful of big players – progress has been complicated by allegations of questionable auditing practices against Chinese outfits.

Nevertheless, leading homegrown accountants, such as ShineWing, continue to take market share away from the dominant groups. Dagong hopes to do the same. Mr Alfonso says: “The aim is to build a bridge between European issuers and Chinese investors.”

Credit rating: an industry is born

Rating agencies have been around since at least the 19th century, when institutions were established to rate the ability of merchants to pay back their debts.

The agencies flourished in the US during the era of railway-building, which required large amounts of borrowing. It was during this period that the country’s enviably deep capital markets developed in earnest.

In 1860 Henry Poor, founder of the company that was to become Standard & Poor’s nearly a century later, published a “History of Railroads and Canals in the United States” – a work that turned out to be one of the precursors of modern securities analysis.

By the early 20th century Mr Poor had diversified into rating stocks and bonds as well as debt in a bid to prevent investors from losing their shirts.

In 1924, meanwhile, industry rival Fitch introduced a ratings system from triple A through to D, which became the standard industry template to indicate risk.