Rating Agencies: The Oligopoly Model

Introduction

Credit rating agencies assess the creditworthiness of debt issuers (governments, corporations, financial institutions) and their securities, assigning letter-grade ratings (AAA to D) that determine borrowing costs, investor eligibility, and regulatory capital treatment. The industry is dominated by one of the most durable oligopolies in financial services: S&P Global Ratings, Moody's Ratings, and Fitch Ratings collectively control over 90% of the global ratings market and 91% of all Nationally Recognized Statistical Rating Organization (NRSRO) revenue. This concentration, combined with the issuer-pays business model, regulatory entrenchment, and extraordinary profit margins (Moody's posted a 42% operating margin in 2024), makes rating agencies one of the most attractive business models in FIG.

Rating agency revenue is directly linked to debt issuance volume: investment-grade corporate bond issuance reached $1.5 trillion in 2024 (up 24% from 2023), while high-yield issuance surged to $302 billion (from $183.6 billion). With corporate bonds outstanding totaling $11.5 trillion and global debt markets continuing to expand, the structural demand for credit ratings continues to grow.

The defining feature of rating agency economics is the issuer-pays model: the entity being rated (the bond issuer) pays the rating agency for the evaluation, rather than the investors who use the rating to make investment decisions. This creates a structural conflict of interest (the agency is paid by the party it evaluates) but also creates the economic foundation for the business:

Revenue generation: every time a corporation, government, or financial institution issues debt, it pays one or more rating agencies to rate the securities. Fees are typically based on the size of the issuance (larger deals generate higher fees) and the complexity of the structure (securitized products require more analytical work than simple corporate bonds).

Volume sensitivity: rating revenue rises when debt capital markets are active (more issuance = more ratings fees) and declines during market downturns. This creates cyclicality, but the long-term trend is favorable: global debt outstanding continues to grow, driven by government deficit spending, corporate refinancing, and expanding securitization markets.

Pricing power: issuers need ratings from at least one (typically two) of the Big Three to access public debt markets. Investors require rated securities for portfolio inclusion, and regulators reference ratings in capital requirement calculations. This creates inelastic demand: issuers will pay for ratings regardless of fee levels because the alternative (issuing unrated debt at significantly higher yields) is far more expensive.

Nationally Recognized Statistical Rating Organization (NRSRO)

A credit rating agency registered with the SEC that meets specific standards for credibility, independence, and analytical rigor. The NRSRO designation is the regulatory gateway to the credit rating business in the US: ratings from NRSROs are referenced throughout financial regulation (Basel III capital requirements, insurance company investment guidelines, money market fund eligibility rules, bank risk-weighting frameworks). As of 2024, there are only 10 NRSROs: three large (S&P, Moody's, Fitch), three medium, and four small. The Big Three generate 91% of all NRSRO revenue. The NRSRO framework effectively creates a regulatory moat: new entrants must achieve SEC recognition, build analytical credibility, and overcome the network effects that bind issuers and investors to the established agencies. For FIG analysts, understanding the NRSRO designation is essential because it explains why the rating agency oligopoly persists despite widespread criticism of the issuer-pays model and the agencies' role in the 2008 financial crisis.

S&P Global Ratings

S&P's Ratings segment generated $4.37 billion in revenue in 2024, representing approximately 16% of S&P Global's total revenue. S&P rates approximately 1.4 million issues across corporate bonds, structured finance, sovereign debt, and municipal securities.

Moody's Corporation

Moody's total revenue encompasses both Moody's Ratings (the credit rating business) and Moody's Analytics (a data, research, and risk management software business). Moody's Ratings generates the majority of profit. Moody's posted a 42% operating margin in 2024, with free cash flow of $2.52 billion (over 100% FCF conversion rate). Adjusted EPS rose 26% to $12.47 in 2024, with management guiding to $14.00-14.50 in 2025 (12-16% growth). Moody's holds approximately 40% global credit ratings market share.

Fitch Ratings

Fitch (owned by Hearst Corporation) holds approximately 15% market share. Fitch is the smallest of the Big Three but maintains significant market presence, particularly in structured finance, insurance, and sovereign ratings.

The European regulatory framework for credit rating agencies operates through ESMA (European Securities and Markets Authority), which directly supervises and registers all rating agencies operating in the EU under the CRA Regulation. Unlike the US NRSRO system (where SEC registration is the gateway), the EU framework includes mandatory rotation requirements for structured finance ratings, restrictions on rating agency advisory services, and civil liability provisions that make agencies potentially liable for investor losses caused by negligent or intentional rating failures. The EU has also sought to reduce reliance on Big Three ratings through the European Rating Platform and efforts to promote smaller agencies like Scope Ratings (Berlin-based, the only European-headquartered agency among the larger players). Despite these efforts, S&P, Moody's, and Fitch remain dominant in European debt markets because issuers targeting global investor bases need ratings recognized by both US and European regulators.

The credit rating agency oligopoly is one of the most durable competitive structures in financial services. Despite criticism of the issuer-pays model, regulatory efforts to reduce rating dependence, and the 2008 crisis that exposed analytical failures, the Big Three continue to control over 90% of the market and generate operating margins above 40%. For FIG professionals, rating agencies are relevant both as analytical infrastructure (ratings determine the credit risk framework for bank capital, insurance investment, and securitization economics) and as some of the most profitable business models within the FIG universe.