KBRA ratings universe grows heading into 14th year in public finance

As KBRA enters its 14th year in the business, the rating agency is targeting increased market share, an expansion into new sectors and the expectation for continued growth in 2024. 

A robust track record, a team approach, and relying on cross-team verticals to provide a qualitative overlay and outside-the-box analysis led the fourth major rating agency to add more than 25 newly rated credits to its repertoire in 2023, KBRA officials said in a recent interview with The Bond Buyer.

Its expansion since inception is evidenced by increased market share, the rise in high-profile issuers as clients, and the growth in deals rated by KBRA some 12 years after its first public finance rating debuted.

High-profile issuers the firm added in 2023 include: the state of Oregon,Atlanta Hartsfield-Jackson Atlanta International Airport, the New York Power Authority, the Sports Authority of the Metropolitan Government of Nashville and Davidson County stadium project for the Tennessee Titans, the state of Alaska, and the Massachusetts Bay Transportation Authority senior tax bonds, to name a few.

The firm rated $40 billion of new issuance in 2023. KBRA’s rated universe has grown from $302.2 billion in 2018 to $473 billion of municipal securities as of yearend 2023, or about 10% of the municipal market, according to the firm.

The average size of the deals it rated in 2023 was $485 million, up from $398 million in 2018.

In addition, the number of deals with KBRA and only one other agency rose to $3.63 billion in 15 deals in 2023, according to data from the firm as of yearend.

It recently has increased its footprint in 501(c)3s and utilities.

The growth doesn’t happen in a vacuum, according to Karen Daly, head of the public finance ratings group.

Karen Daly, head of public finance ratings at KBRA

“It reflects the quality of our work and the acceptance by the market,” Daly said of the firm’s experience, deep bench of analysts, and its ability to articulate ratings positions that gain the trust of intermediaries and resonate with issuers.

“The numbers speak for themselves,” said Peter Giacone, managing director and global head of the insurance ratings team, who also oversees the public finance ratings group.

“For every one of the ratings we have completed, we have put in hard thought, doing what we have done best,” Giacone said, including “applying the right approach, not being afraid of a challenge, and having an unwavering commitment that is trusted by the issuers.”

“The numbers are an outcome, not a target,” he added. “We do our job and success comes naturally.”

KBRA rated $40 billion of municipal bonds, comprised of $12 billion, $7.2 billion, $8.7 billion, and $12.5 billion in the first, second, third, and fourth quarters, respectively, as of Dec. 31, the firm said.

Peter Giaccone, managing director and global head of the insurance ratings team at KBRA

Daly and Giacone both said the growth also stems from analysts’ imparting a broader or different perspective on credits, as well as understanding credits and sectors that may be interpreted differently by other rating agencies.

Its record of what Daly and Giacone referred to as “thought leadership” is rooted in finding the nuances and distinctions of a credit and being nimble when it comes to delivering unique perspectives and rigorous research that go beyond a “rigid scorecard approach” to address investors’ needs and concerns.

“That nimbleness is a huge competitive advantage,” Giacone said. “Being nimble and not leaving any stone unturned has led to a lot of the success.” 

KBRA publishes detailed, transparent reports to provide not only ratings, but also rationale, to the market, they said.

“We don’t articulate these points of view in a vacuum — there is a considerable amount of discussion when we take a different position,” Daly said. “It’s not one individual; it’s a team of very experienced people articulating this point of view.”

This methodology is even more important in a market where interest rates have risen and credit profiles are growing more complex, Daly and Giacone noted.

The recent growth is a natural extension of the business, which began in 2010 with a core foundation in infrastructure ratings and a goal of providing timely and transparent ratings, alternative solutions, and in-depth research across various sectors in the U.S. and Europe.

“We strive to provide the investment community with the products and tools needed to make informed investment decisions,” according to KBRA’s website.

The public finance ratings team began growing rapidly following a 2015 report that detailed the case for the U.S. public-owned airport sector, according to Daly. 

“We thought it was a historically underrated sector since it has no defaults, strong management teams, and was underemphasized by others,” she said.

The commentary earned KBRA some attention in the market and it soon established a significant footprint with ratings in the airport sector, Daly said.

Fast-forward eight years to the summer of 2023, the firm published a report on Texas Tech University in Lubbock, in conjunction with the university’s $250 million deal, in which the rating agency argued the outstanding ratings were too low and the default and recovery risk were detached from the reality of other private college credit ratings.

The report won KBRA praise among issuers and other market intermediaries, such as financial advisors, issuers, and investment bankers, Daly said, and as a result, will lead to organic growth in the higher education and private college sector.

In addition to rating a growing number of large issuers each year for the last five years, numbers have picked up even more post-pandemic.

“We have made our mark articulating a position with intermediaries and issuers, and that has resulted in a large portfolio of special tax credits and affiliated credits with the GO entities,” she said. 

“It’s a question of communicating with the market on our point of view,” Daly said. “When you have been doing it for a long time, the analysts understand these perspectives, and these lineages, and can articulate it to market participants.” 

Giacone agreed, saying the firm is committed to addressing the needs of key stakeholders, and investors.

“From bringing investors a perspective to a conversation with issuers, we believe the market has benefited from our more accurate ratings,” Giacone said. “Investors have tended to agree with us.”

“We have a qualitative overlay we think allows us to bring that nuance to bear where existing ratings were lacking,” he said.

Both Giacone and Daly said the growth and expansion of its public finance business has “super-charged” the overall growth of the firm.

“The story here on the public finance front has been repeated across KBRA,” Giacone said. “Because of the way capital markets behave, working across asset classes has given us the visibility that has grown the firm as whole.”

“The growth of the company has helped the growth of public finance and vice versa,” Daly agreed.

She noted public finance transactions have become more complex over the years and a significant portion often require expertise from cross-team verticals and methodologies to arrive at the best analysis.

“When other [KBRA] groups or teams need our expertise or input on their financings, we work with them to support their analysis,” she said. “Conversely, this allows the public finance team to draw upon the expertise embedded across the company for transactions incorporating cross-team methodologies.”

Giacone said this approach allows KBRA to bring “a unique toolbox” to the market.

Daly and Giacone said one of the only challenges the firm faces is not being able to control market volume, which has fallen dramatically in the last two years.

“To the extent we turn the corner on that in 2024 and we see volume pick up, we will be ready to serve the market with our perspective in any way that is requested,” she said.

“At the end of the day what issuers want from us is their credit understood and their story conveyed,” Daly said.

She said the narrative that explains credits is what the market has come to rely on.

“It’s not magic, but it’s rolling up our sleeves and doing hard work and explaining it so anyone who picks up our report can understand the credit story,” Daly said.