For years, one credit-ratings firm has handed out the most favourable grades to corporate borrowers in the Canadian bond market: Morningstar DBRS. On average, its ratings are one full notch higher than those assigned by S&P Global Ratings, Moody\u2019s Ratings and Fitch Ratings.<\/p>\n
So when companies, eager to cut costs, suddenly started issuing a raft of bonds with only a single credit rating \u2014 instead of the two or three that had long been the norm \u2014 the firm they tapped, time and again, to assign them was DBRS. There were 111 such deals in 2025, more than the total from the previous two years combined, and several more in January. DBRS handled more than 80% of them, data compiled by Bloomberg show.<\/p>\n
The surge in single-rated sales helped DBRS deepen its dominance in Canada and rake in revenue for its credit division, an area that\u2019s become the fastest-growing business line for its parent company, Morningstar Inc.<\/p>\n
But as the Canadian bond market heats up and cash-flush investors take on more and more risk \u2014 including by buying bonds that don\u2019t provide at least two independent ratings \u2014 the practice is also raising concern that DBRS is helping fan a credit boom that could lead to excesses and losses down the road. These are similar to the worries that have emerged in frothy credit markets across the globe, triggering warnings from regulators and investors about the revival of ratings shopping \u2014 where borrowers hire the raters with the rosiest outlooks \u2014 that helped spark so many painful blowups before.<\/p>\n
\u201cOne way to win business is just to give better ratings,\u201d says Bill Harrington, a senior fellow with the nonprofit Croatan Institute in New York who analyses credit ratings on swaps and securitised loans.<\/p>\n
Upon looking at the Canadian credit ratings data, Harrington, who spent over a decade at Moody\u2019s, said it reminded him of the ratings shopping he\u2019s seen elsewhere over the years. \u201cThe damage typically shows up when things go wrong.\u201d<\/p>\n
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Executives at DBRS expressed confidence in the ratings their analysts assign and the methods they use. Handing out inflated ratings would just be self-defeating, the executives said, because it would damage the firm\u2019s reputation in the market.<\/p>\n
\u201cYou\u2019re not going to be credible when you give away higher ratings. That just doesn\u2019t work,\u201d said Alan Reid, group managing director and global head of fundamental credit ratings at the firm. \u201cWhether our ratings are \u2014 for that matter, any rating agency\u2019s ratings are higher or lower, that doesn\u2019t mean that they\u2019re wrong.\u201d<\/p>\n
Reid pointed to a DBRS report showing credit ratings on bonds, including sovereigns and public finance, doled out by the firm from 1976 through 2024 performed as one would expect, with the incidence of defaults gradually picking up as the debt grades worsened.<\/p>\n
Defaults, in fact, have been rare in general in Canada\u2019s $440 billion corporate bond market. There have only been a handful in recent years, according to data compiled by Bloomberg.<\/p>\n
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\u201cWe have broad, consistent, long-standing coverage of Canada and understand the Canadian market deeply,\u201d said Richard Sibthorpe, head of Canada and global investor strategy at Morningstar DBRS.<\/p>\n
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The firm was founded in Toronto in the 1970s under the name Dominion Bond Rating Service and, after years of growth, was acquired by Morningstar for $669 million in 2019.<\/p>\n
It\u2019s been awarding rosier ratings than S&P, Moody\u2019s and Fitch in Canada for over a decade now. (Figures from last year show a similar pattern in the US, though DBRS plays a far smaller role in that market.) Moreover, the gap between its ratings and those of its rivals has grown in recent years.<\/p>\n
In private, investors and bankers here are quick to acknowledge just how out of whack DBRS\u2019s ratings look. Some even refer to that disparity \u2014 and the opportunities it creates \u2014 as the worst-kept secret in Toronto\u2019s financial district.<\/p>\n
Worried, though, that they could alienate colleagues in the city\u2019s clubby credit circles, few were willing to publicly articulate those views.<\/p>\n
Etienne Bordeleau was one of those who did.<\/p>\n
A portfolio manager at Ninepoint Partners, he said he gets why cost-conscious CFOs are opting to sell bonds with just a single rating but is concerned those deals could create distortions in the market.<\/p>\n
\u201cIt is concerning that the primary rating agency they use, DBRS, seems to systematically offer better ratings,\u201d Bordeleau said. \u201cThis could artificially inflate the credit quality of Canadian bond indices while offering firms opportunities to arbitrage ratings in a way that disadvantages investors.\u201d<\/p>\n
DBRS\u2019s Reid said the trend of companies moving toward fewer ratings is a global phenomenon and not limited to Canada.<\/p>\n
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Allied Properties<\/span><\/h3>\nEven a tiny ratings edge can be enough to recast a junk bond as a high-grade investment, opening the door to better terms and a wider swath of investors.<\/p>\n
Take the case of Allied Properties Real Estate Investment Trust. In 2024, the Toronto-based REIT\u2019s debt was rated investment-grade by DBRS but junk by Moody\u2019s, given its relatively high leverage and the difficulties facing the office real estate sector. So when the firm sold C$250 million of four-year bonds that year, it had to pay an interest rate equal to 2.8 percentage points above government bond yields.<\/p>\n
Then in 2025, Allied had Moody\u2019s withdraw its issuer rating, which left it with just the investment-grade rating from DBRS. Months later, the company sold a six-year bond at a yield spread that was nearly 1 percentage point tighter than its four-year bond.<\/p>\n
Representatives for Allied didn\u2019t respond to requests for comment. A Moody\u2019s spokesperson declined to comment on Allied\u2019s decision to withdraw its rating but said that in general, withdrawals at issuers\u2019 requests are done for \u201cbusiness reasons.\u201d<\/p>\n
Caught in Crisis<\/span><\/h3>\nInvestors have long had a complicated relationship with bond graders.<\/p>\n
Money managers rely on ratings as a quick guide to the credit quality of a borrower, and in some cases, investors specify minimum ratings for the bonds that an asset management firm can buy, such as only investment-grade bonds, as a high-level way to constrain what ends up in their portfolio.<\/p>\n
At the same time, ratings firms have been at the centre of a series of scandals since the turn of the century. The graders missed accounting frauds at Enron Corp. and Worldcom in the early 2000s and then, a few years later, were blamed for enabling the subprime mortgage-market bubble that triggered the global financial crisis. Under pressure from lawmakers, the firms changed policies and spent heavily to fix their processes.<\/p>\n
The crises did little to upset the triumvirate of S&P, Moody\u2019s and Fitch, leaving DBRS a distant fourth in the US.<\/p>\n
\u2018Gamesmanship\u2019<\/span><\/h3>\nThe current debt-investing frenzy in Canada, triggered in part by the central bank\u2019s two-year push to lower interest rates, has made corporate borrowers more opportunistic, said Brian Calder, a portfolio manager at Franklin Templeton Canada. \u201cThey\u2019re playing a little bit of gamesmanship as far as rating agencies.\u201d<\/p>\n
\u201cThey\u2019re dropping certain ratings to make things more favourable for themselves,\u201d Calder said, \u201cor they\u2019re just excluding them altogether when they\u2019re getting their initial ratings.\u201d<\/p>\n
Russel Metals Inc., for example, had issuer ratings of investment-grade from DBRS and junk from S&P last year. But when the steel distributor decided to raise C$300 million in financing from investors in March, it only asked DBRS to rate the new bond. That bond rating, like the issuer rating, was investment-grade. (S&P subsequently upgraded its issuer rating on Russel Metals to investment-grade, too).<\/p>\n
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A representative for Russel Metals declined to comment.<\/p>\n
\u2018Worst of Loans\u2019<\/span><\/h3>\nSingle ratings are particularly common among real estate trusts. First Capital REIT, Granite REIT and CT REIT all had ratings withdrawn, like Allied did, in favour of higher or equivalent ratings from DBRS over the past few years.<\/p>\n
Teresa Neto, Granite\u2019s chief financial officer, said DBRS is more comfortable giving higher ratings because it knows the borrowers and Canada\u2019s banking industry better. Granite dropped Moody\u2019s rating last year because it decided that, given that it wasn\u2019t looking to sell bonds outside Canada, all it needed was the DBRS rating. Investors in Canada, Neto said, \u201cwere increasingly getting comfortable and saying we don\u2019t actually need two ratings.\u201d<\/p>\n
Representatives for First Capital and CT didn\u2019t respond to requests for comment.<\/p>\n
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It\u2019s risky to have an entire sector dependent on ratings from just one firm, which could spur sharp bond price swings if it were to change its outlook, <\/em>said Daniel Child, a portfolio manager at YTM Capital Asset Management Ltd. He said he\u2019s witnessed \u201ca slow drip of less and less protection for bondholders and creditors\u201d in recent decades.<\/p>\nMeanwhile, the risk premium to hold Canadian corporate bonds compared to safer government bonds is hovering around the tightest levels since 2007 as momentum-chasers pile in, adding to the surge in demand. Passive investors tracking bond indexes are the most vulnerable. They\u2019re forced to buy chunks of large bond deals from a limited pool of sellers in Canada.<\/p>\n
\u201cAs the saying goes, you make the worst of loans in the best of times,\u201d Child said. \u201cThere are bond deals that get done in good times that probably shouldn\u2019t and wouldn\u2019t get done in bad times.\u201d<\/p>\n
The hunger for single-rated bonds will die down when the credit bull run inevitably ends, said Franklin Templeton\u2019s Calder. \u201cWe will look back and say that we saw it coming,\u201d he said.<\/p>\n
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Investors have long had a complicated relationship with bond graders.<\/p>\n
Money managers rely on ratings as a quick guide to the credit quality of a borrower, and in some cases, investors specify minimum ratings for the bonds that an asset management firm can buy, such as only investment-grade bonds, as a high-level way to constrain what ends up in their portfolio.<\/p>\n
At the same time, ratings firms have been at the centre of a series of scandals since the turn of the century. The graders missed accounting frauds at Enron Corp. and Worldcom in the early 2000s and then, a few years later, were blamed for enabling the subprime mortgage-market bubble that triggered the global financial crisis. Under pressure from lawmakers, the firms changed policies and spent heavily to fix their processes.<\/p>\n
The crises did little to upset the triumvirate of S&P, Moody\u2019s and Fitch, leaving DBRS a distant fourth in the US.<\/p>\n
\u2018Gamesmanship\u2019<\/span><\/h3>\nThe current debt-investing frenzy in Canada, triggered in part by the central bank\u2019s two-year push to lower interest rates, has made corporate borrowers more opportunistic, said Brian Calder, a portfolio manager at Franklin Templeton Canada. \u201cThey\u2019re playing a little bit of gamesmanship as far as rating agencies.\u201d<\/p>\n
\u201cThey\u2019re dropping certain ratings to make things more favourable for themselves,\u201d Calder said, \u201cor they\u2019re just excluding them altogether when they\u2019re getting their initial ratings.\u201d<\/p>\n
Russel Metals Inc., for example, had issuer ratings of investment-grade from DBRS and junk from S&P last year. But when the steel distributor decided to raise C$300 million in financing from investors in March, it only asked DBRS to rate the new bond. That bond rating, like the issuer rating, was investment-grade. (S&P subsequently upgraded its issuer rating on Russel Metals to investment-grade, too).<\/p>\n
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A representative for Russel Metals declined to comment.<\/p>\n
\u2018Worst of Loans\u2019<\/span><\/h3>\nSingle ratings are particularly common among real estate trusts. First Capital REIT, Granite REIT and CT REIT all had ratings withdrawn, like Allied did, in favour of higher or equivalent ratings from DBRS over the past few years.<\/p>\n
Teresa Neto, Granite\u2019s chief financial officer, said DBRS is more comfortable giving higher ratings because it knows the borrowers and Canada\u2019s banking industry better. Granite dropped Moody\u2019s rating last year because it decided that, given that it wasn\u2019t looking to sell bonds outside Canada, all it needed was the DBRS rating. Investors in Canada, Neto said, \u201cwere increasingly getting comfortable and saying we don\u2019t actually need two ratings.\u201d<\/p>\n
Representatives for First Capital and CT didn\u2019t respond to requests for comment.<\/p>\n
<\/p>\n
It\u2019s risky to have an entire sector dependent on ratings from just one firm, which could spur sharp bond price swings if it were to change its outlook, <\/em>said Daniel Child, a portfolio manager at YTM Capital Asset Management Ltd. He said he\u2019s witnessed \u201ca slow drip of less and less protection for bondholders and creditors\u201d in recent decades.<\/p>\nMeanwhile, the risk premium to hold Canadian corporate bonds compared to safer government bonds is hovering around the tightest levels since 2007 as momentum-chasers pile in, adding to the surge in demand. Passive investors tracking bond indexes are the most vulnerable. They\u2019re forced to buy chunks of large bond deals from a limited pool of sellers in Canada.<\/p>\n
\u201cAs the saying goes, you make the worst of loans in the best of times,\u201d Child said. \u201cThere are bond deals that get done in good times that probably shouldn\u2019t and wouldn\u2019t get done in bad times.\u201d<\/p>\n
The hunger for single-rated bonds will die down when the credit bull run inevitably ends, said Franklin Templeton\u2019s Calder. \u201cWe will look back and say that we saw it coming,\u201d he said.<\/p>\n
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A representative for Russel Metals declined to comment.<\/p>\n
\u2018Worst of Loans\u2019<\/span><\/h3>\nSingle ratings are particularly common among real estate trusts. First Capital REIT, Granite REIT and CT REIT all had ratings withdrawn, like Allied did, in favour of higher or equivalent ratings from DBRS over the past few years.<\/p>\n
Teresa Neto, Granite\u2019s chief financial officer, said DBRS is more comfortable giving higher ratings because it knows the borrowers and Canada\u2019s banking industry better. Granite dropped Moody\u2019s rating last year because it decided that, given that it wasn\u2019t looking to sell bonds outside Canada, all it needed was the DBRS rating. Investors in Canada, Neto said, \u201cwere increasingly getting comfortable and saying we don\u2019t actually need two ratings.\u201d<\/p>\n
Representatives for First Capital and CT didn\u2019t respond to requests for comment.<\/p>\n
<\/p>\n
It\u2019s risky to have an entire sector dependent on ratings from just one firm, which could spur sharp bond price swings if it were to change its outlook, <\/em>said Daniel Child, a portfolio manager at YTM Capital Asset Management Ltd. He said he\u2019s witnessed \u201ca slow drip of less and less protection for bondholders and creditors\u201d in recent decades.<\/p>\nMeanwhile, the risk premium to hold Canadian corporate bonds compared to safer government bonds is hovering around the tightest levels since 2007 as momentum-chasers pile in, adding to the surge in demand. Passive investors tracking bond indexes are the most vulnerable. They\u2019re forced to buy chunks of large bond deals from a limited pool of sellers in Canada.<\/p>\n
\u201cAs the saying goes, you make the worst of loans in the best of times,\u201d Child said. \u201cThere are bond deals that get done in good times that probably shouldn\u2019t and wouldn\u2019t get done in bad times.\u201d<\/p>\n
The hunger for single-rated bonds will die down when the credit bull run inevitably ends, said Franklin Templeton\u2019s Calder. \u201cWe will look back and say that we saw it coming,\u201d he said.<\/p>\n
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Follow Moneyweb\u2019s in-depth finance and business news on WhatsApp here.<\/em><\/p>\n<\/p><\/div>\n
<\/p>\nMeanwhile, the risk premium to hold Canadian corporate bonds compared to safer government bonds is hovering around the tightest levels since 2007 as momentum-chasers pile in, adding to the surge in demand. Passive investors tracking bond indexes are the most vulnerable. They\u2019re forced to buy chunks of large bond deals from a limited pool of sellers in Canada.<\/p>\n
\u201cAs the saying goes, you make the worst of loans in the best of times,\u201d Child said. \u201cThere are bond deals that get done in good times that probably shouldn\u2019t and wouldn\u2019t get done in bad times.\u201d<\/p>\n
The hunger for single-rated bonds will die down when the credit bull run inevitably ends, said Franklin Templeton\u2019s Calder. \u201cWe will look back and say that we saw it coming,\u201d he said.<\/p>\n
\u00a9 2026 Bloomberg<\/p>\n
Follow Moneyweb\u2019s in-depth finance and business news on WhatsApp here.<\/em><\/p>\n<\/p><\/div>\n