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’s Ratings and Fitch Ratings.

So when companies, eager to cut costs, suddenly started issuing a raft of bonds with only a single credit rating — instead of the two or three that had long been the norm — 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 per cent of them, data compiled by Bloomberg show.

The surge in single-rated sales helped DBRS deepen its dominance in Canada and rake in revenue for its credit division, an area that that’s become the fastest-growing business line for its parent company, Morningstar Inc.

 

But as the

Canadian bond market

heats up and cash-flush investors take on more and more risk — including by buying bonds that don’t provide at least two independent ratings — 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 and triggered warnings from regulators and investors about the revival of the kind of ratings shopping — where borrowers hire the raters with the rosiest outlooks — that helped spark so many painful blowups before.

“One way to win business is just to give better ratings,” says Bill Harrington, a senior fellow with the nonprofit Croatan Institute in New York who analyzes credit ratings on swaps and securitized loans.

Upon looking at the Canadian credit ratings data, Harrington, who spent over a decade at Moody’s, said it reminded him of the ratings shopping he’s seen elsewhere over the years. “The damage typically shows up when things go wrong.”

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’s reputation in the market.

“You’re not going to be credible when you give away higher ratings. That just doesn’t work,” said Alan Reid, group managing director and global head of fundamental credit ratings at the firm. “Whether our ratings are — for that matter, any rating agency’s ratings are — higher or lower, that doesn’t mean that they’re wrong.”

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.

Defaults, in fact, have been rare in general in Canada’s US$440 billion corporate bond market. There have only been a handful in recent years, according to data compiled by Bloomberg.

“We have broad, consistent, long-standing coverage of Canada and understand the Canadian market deeply,” said Richard Sibthorpe, head of Canada at DBRS.

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 US$669 million in 2019.

It’s been awarding rosier ratings than S&P, Moody’s and Fitch in Canada for over a decade now. (Figures from last year show a similar pattern in the U.S. 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.

In private, investors and bankers here are quick to acknowledge just how out of whack DBRS’s ratings look. Some even refer to that disparity — and the opportunities it creates — as the worst kept secret in Toronto’s financial district.

Worried, though, that they could alienate colleagues in the city’s clubby credit circles, few were willing to publicly articulate those views.

Etienne Bordeleau was one of those who did.

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.

“It is concerning that the primary rating agency they use, DBRS, seems to systematically offer better ratings,” Bordeleau said. “This could artificially inflate the credit quality of Canadian bond indices while offering firms opportunities to arbitrage ratings in a way that disadvantages investors.”

DBRS’s Reid said the trend of companies moving toward fewer ratings is a global phenomenon and not limited to Canada.

Allied properties

Even 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.

Take the case of Allied Properties Real Estate Investment Trust. In 2024, the Toronto-based REIT’s debt was rated investment-grade by DBRS but junk by Moody’s, given its relatively high leverage and the difficulties facing the office real estate sector. So when the firm sold $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.

Then in 2025, Allied had Moody’s 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.

Representatives for Allied didn’t respond to requests for comment. A Moody’s spokesperson declined to comment on Allied’s decision to withdraw its rating but said that in general, withdrawals at issuers’ requests are done for “business reasons.”

Caught in crisis

Investors have long had a complicated relationship with bond graders.

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.

At the same time, ratings firms have been at the center 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.

The crises did little to upset the triumvirate of S&P, Moody’s and Fitch, leaving DBRS a distant fourth in the U.S.

‘Gamesmanship’

The current debt-investing frenzy in Canada, triggered in part by the central bank’s two-year push to lower

interest rates

, has made corporate borrowers more opportunistic, said Brian Calder, a portfolio manager at Franklin Templeton Canada. “They’re playing a little bit of gamesmanship as far as rating agencies.”

“They’re dropping certain ratings to make things more favorable for themselves,” Calder said, “or they’re just excluding them altogether when they’re getting their initial ratings.”

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 $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).

A representative for Russel Metals declined to comment.

‘Worst of loans’

Single 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.

Teresa Neto, Granite’s chief financial officer, said DBRS is more comfortable giving higher ratings because it knows the borrowers and Canada’s banking industry better. Granite dropped Moody’s rating last year because it decided that, given that it wasn’t looking to sell bonds outside Canada, all it needed was the DBRS rating. Investors in Canada, Neto said, “were increasingly getting comfortable and saying we don’t actually need two ratings.”

Representatives for First Capital and CT didn’t respond to requests for comment.

It’s 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, said Daniel Child, a portfolio manager at YTM Capital Asset Management Ltd. He said he’s witnessed “a slow drip of less and less protection for bondholders and creditors” in recent decades.

Meanwhile, 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’re forced to buy chunks of large bond deals from a limited pool of sellers in Canada.

“As the saying goes, you make the worst of loans in the best of times,” Child said. “There are bond deals that get done in good times that probably shouldn’t and wouldn’t get done in bad times.”

The hunger for single-rated bonds will die down when the credit bull run inevitably ends, said Franklin Templeton’s Calder. “We will look back and say that we saw it coming,” he said.

With assistance from Jessica Cerbone, Brad Skillman, Brian Smith, Andrea Niper and Derek Decloet.

Bloomberg.com