Morningstar logo

In this Content Partner Profile, Haywood Kelly, Senior Vice President of Equity and Credit Research at Morningstar, gives us a detailed view of this new database on Alacra.


1. Tell us about Morningstar’s new Credit Research Service.

We're extremely excited about our credit research initiative, and have been getting tremendous feedback in the marketplace. We launched corporate credit ratings in December 2009, and have been ramping up coverage ever since. We have credit ratings on about 650 firms as of early November, and that will be 700 firms by year-end.

Our credit research service includes written reports on each company that detail the rationale for our rating, as well as a discussion of its capital structure and competitive position. Each report also contains a host of data from our cash-flow models to allow clients to see exactly where we think the company is headed.

In addition to the company reports, we publish a Best Ideas list that contains a sector-by-sector rundown of our best bond ideas. Our approach to bond recommendations is straightforward. Our credit rating serves our anchor, indicating where we think the bonds should trade. Then we look for bonds trading at richer spreads than warranted by our credit analysis.

And the best way to keep up on our credit efforts is our Credit Research Weekly, which comes out every Monday morning. In it we summarize rating initiations and changes, bond-market trends, and provide details on our overall coverage list.

2. What are some typical uses for this type of content?

Our main clients are buyside firms. Portfolio managers and analysts use our service to help them stay on top of more companies than they could otherwise. Our full service includes access to our analysts, our in-depth cash-flow models, as well as all of our written research (Credit Research Weekly, Best Bond Ideas, credit reports, company visit notes, earnings notes, etc).

We also license the written company reports to financial advisors. Helping advisors and their clients stay on top of investments has long been a priority for Morningstar.

3. How would you describe your coverage?

Our goal is to cover all of the corporate bond issuers that investors care about, and we believe we're very close to meeting that goal. And because we cover 1,500 firms on the equity side, we have the models and expertise in place to comment on the credit quality of many more firms than that. So if an eBay issues bonds for the first time, as it did recently, we'll have something to say because we've covered that company for years.

In terms of how we're structured, our credit analysts sit right alongside our equity analysts. So if we're reviewing the credit rating on a particular company, the credit and equity analyst covering that firm work in tandem, and their recommendation is then reviewed by a credit rating committee of senior personnel.

4. What do you think makes your content unique in the marketplace?

Several things. First of all, over the past 10 years we've developed an approach to company and industry analysis that sets us apart. Our specialty is assessing a firm's competitive position, which is encapsulated in our Economic Moat Rating. The wider the moat, the better positioned the company is to withstand competitive threats and weather economic turmoil. Although we developed the moat framework within an equity context, this kind of analysis lends itself directly to credit analysis. After all, if you're buying a 10-year bond of a company, you need to know how likely that company is to be around and healthy 10 years from now.

The second feature that sets us apart is our combination of depth and breadth. We're not aware of any other shop that offers the combination of a consistent fundamental approach, full five-year pro-forma models, and in-depth written research on as many companies as we do. Our clients can pull up any of our models and see exactly what assumptions lead us to a particular credit rating. They can even change those assumptions if they want to do their own stress testing.

And finally, we're unabashedly forward-looking in our approach. Along with the Economic Moat Rating, our five-year cash-flow forecasts play a big role in our credit ratings. And when we talk about forecasts, we also mean forecasts of upside and downside scenarios. We've been embedding such scenario analysis into our research process for several years now, and of course on the credit side we pay particular attention to the downside scenarios. For example, a company may look like a single-A credit in a base-case scenario, but a BBB in a downside scenario.

5. How has the recent economic crisis impacted your market?

We've actually seen increased business in our research business. The sell -side has cut back coverage, and many independent firms have faded away.

So our buyside business has been growing by leaps and bounds. I'd also point out that one of the spurs for us launching our credit research service was the number of investors we talked to who were looking for bargains among bonds in the  wake of the crisis. In 2008 we saw incredible bargains further up the capital structure, but didn't have a framework for surfacing those ideas to our clients in a systematic fashion. Now we do.

6. How has your business changed in recent years? What changes do you expect in the coming years?

I would expect our research to become much more global. We've been pleasantly surprised at the reception both our equity and credit coverage has received overseas. I think there's a real hunger for good fundamental analysis out there, and our Economic Moat framework in particular has resonated with many non-U.S. investors, as well as U.S. investors looking for quality firms outside the U.S. We've been adding non-U.S. coverage on the equity side and are now up to about 650 non-U.S. companies. By the end of 2010 we'll have credit ratings on about 100 of those firms. Over the next few years I expect both those numbers to grow significantly.


Visit Morningstar's databases at

Morningstar Credit Research

Morningstar Earnings Call Transcripts

Morningstar Health Care Observer

Morningstar Equity Research

If you are interested in contributing your content to the Alacra Store(, please contact Steve Davison at steven[dot]davison[at]alacra[dot]com.