Morningstar to Expand Credit Rating Business with $669M Deal

CHICAGO—Locally-based Morningstar Inc. has reached a definitive agreement to significantly expand its Morningstar Credit Ratings’ US business with the purchase of the world’s fourth largest credit ratings agency DBRS in a $669-million deal.

Morningstar announced on Wednesday it had reached the agreement to acquire the Toronto-based DBRS and expects the deal to close in the third quarter of this year.

The combination of DBRS with Morningstar Credit Ratings’ U.S. business will expand Morningstar’s global asset class coverage and provide an enhanced platform that will provide investors with leading fixed-income analysis and research, the company states.

“The chance to empower investors with the independent research and opinions they need across a multitude of securities first drove our decision to enter the credit ratings business,” says Morningstar CEO Kunal Kapoor. “DBRS and Morningstar share research-centric cultures committed to rigor and independence. Together, we believe we can elevate the industry with the world’s first fintech ratings agency backed by state-of-the-art models, modern technology, and expert research teams that issuers and investors can count on to deliver transparent and independent ratings.”

For more than 40 years, DBRS has built a strong market presence across Europe, the U.S., and Canada. The company rates more than 2,400 issuer families and nearly 50,000 securities worldwide. The Carlyle Group and Warburg Pincus led the acquisition of DBRS in 2014.

DBRS employs more than 500 workers and operates out of seven offices, including its Toronto headquarters, the firm also has offices in New York, Stamford, CT, Chicago, London, Frankfurt and Madrid.

DBRS reported $167 million in revenue for the fiscal year ended Nov. 30, 2018. The business generates strong cash flow with operating margins that are consistent with Morningstar’s overall business, Morningstar notes. On a preliminary pro forma basis, if Morningstar owned DBRS as of Dec. 31, 2018, revenue from credit ratings would have represented approximately 17% of Morningstar’s total revenue.

“DBRS’s more than 40 years of experience and success coupled with Morningstar’s proven capabilities will offer an even stronger global alternative to larger ratings agencies,” says DBRS CEO Stephen Joynt. “Both DBRS and Morningstar are driven by similar core values that aim to bring more clarity, diversity, transparency, and responsiveness to the ratings process, which makes Morningstar a perfect fit for us.”

DBRS will continue to be led by its existing management team. Morningstar reports that it intends to name a leader of the combined businesses by the time the deal closes, and the companies plan to work together on decisions over time regarding the integration of the two firms to ensure the combination is set up for long-term success.

Morningstar intends to fund the transaction with a mix of cash and debt, which will include the placement of a new credit facility at closing.

Lazard Frères & Co. LLC served as exclusive financial advisor to DBRS, and Wachtell, Lipton, Rosen & Katz served as legal counsel to DBRS. Winston & Strawn LLP served as legal counsel to Morningstar.