Oct. 29 (Bloomberg) -- Moody's Corp., the world's second- largest credit-rating company, posted a 17 percent drop in third-quarter profit and cut its 2008 forecast as the credit- market seizure sapped demand for new bond ratings.

Net income fell to $113 million, or 46 cents a share in the period ended Sept. 30, from $136.9 million, or 51 cents, a year earlier, New York-based Moody's said today in a statement.

The biggest financial crisis since the Great Depression ``worsened materially'' in mid-September, Chief Executive Officer Raymond McDaniel said in the statement. The slump has all but shut down the corporate and asset-backed bond markets, curbing demand for debt ratings from Moody's and Standard & Poor's, the biggest credit-rater. S&P parent McGraw-Hill Cos. yesterday said its financial services unit had a 14 percent drop in revenue as the dollar volume of U.S. bond issuance tumbled 62 percent in the third quarter.

Earnings ``were about as bad as one would have expected them to be and they've got a real difficult outlook as bond issuance continues to be sluggish,'' said Edward Atorino, an analyst at Benchmark Co. in New York who has a ``buy'' rating on Moody's shares. ``But rates are down and there's a big pipeline of deals waiting to get done. It's a matter of time before this clog loosens and these deals get done.''

Forecast Cut

Moody's rose 44 cents, or 2.1 percent, to $21.05 in New York Stock Exchange composite trading after profit before a tax gain beat analysts' predictions, a sign that McDaniel is succeeding in cutting expenses faster than some anticipated. Profit excluding the gain was 45 cents a share, compared with the 41-cent average of seven analysts' estimates in a Bloomberg survey.

Revenue declined to $433.4 million from $525 million.

Moody's reduced its full-year earnings projection to $1.71 to $1.77 a share from a previous estimate of $1.90 to $2, reflecting the larger-than-expected drop in new bond sales. Profit in 2007 was $2.58 a share.

``In recent weeks the financial system has experienced significant additional turmoil as core problems in credit have been amplified,'' McDaniel said on a conference call with analysts. ``Timing for recovery remains uncertain and has probably been extended.''

Expenses Drop

Moody's Investors Service, the company's ratings arm, posted a 27 percent decline in revenue to $296.8 million. Profit from structured finance, which includes collateralized debt obligations and securities backed by loans and bonds, dropped 50 percent globally and 65 percent in the U.S. during the quarter, Moody's said. Earnings will decline in the ``mid-sixties'' percent range for the year, the company said today.

McDaniel has cut Moody's workforce by more than 7 percent and slashed other costs to try to stem its earnings decline. Operating expenses were reduced by 11 percent in the quarter.

``We are at a low point in terms of bond issuance in the U.S.,'' McDaniel said on the conference call. ``We're trying to forecast a very weak issuance environment but not a non-existent issuance environment.''

Moody's, whose largest shareholder is Warren Buffett's Berkshire Hathaway Inc., is down about 42 percent this year through yesterday, compared with a 36 percent drop in the S&P 500 index in 2008.

Waxman Criticism

The shares have tumbled about 39 percent in October alone as critics including House Oversight and Government Reform Committee Chairman Henry Waxman, a California Democrat, said the credit-ratings companies' willingness to assign top ratings to bonds backed by subprime mortgages helped spur the credit crisis.

Last week, U.S. House investigators released e-mails they obtained that said Moody's employees told executives that issuing dubious ratings to mortgage-backed securities made it appear they were incompetent or ``sold our soul to the devil for revenue.''

Moody's CEO McDaniel said in written testimony that his company has refined its rating methodologies, increased transparency of its analysis, adopted new policies to avoid conflicts of interest and has ``learned important lessons'' from the market turmoil.

New York-based McGraw-Hill yesterday reported a profit of $1.28 a share, excluding costs to cut jobs, that topped the $1.23 average of six analysts estimates compiled by Bloomberg.

Lowered Forecast

McGraw-Hill also lowered its forecast for full-year earnings to $2.63 to $2.65 a share, not counting restructuring charges and including associated benefits, down from $2.65 to $2.75.

``The housing recession and the credit crunch in the financial markets continue to have an impact on our results,'' CEO Terry McGraw said on a conference call with analysts yesterday discussing the company's earnings. ``It's readily apparent that the third quarter is the weakest of the year for new issuance.''

Corporate bond issuance in the U.S. plummeted 60 percent to $105 billion in the third quarter from the $263 billion issued in the same period of last year, according to data compiled by Bloomberg. In the first half of the year, corporate bond sales were down about 12 percent overall.

Moody's revenue from corporate finance ratings worldwide declined 19 percent to $75 million from the third quarter of 2007 while revenue from global public, project and infrastructure finance climbed 11 percent to $59.7 million.

Creation of asset-backed securities including auto-loan bonds and credit-card debt slumped 69 percent from a year earlier to $43 billion in the third quarter, according to Bloomberg data.

Moody's profit rose more than 30 percent in 2005 and 2006 as sales of asset-backed debt soared. Moody's profit fell 7 percent in 2007 as ABS issuance dropped.

To contact the reporter on this story: Caroline Salas in New York at csalas1@bloomberg.net

Last Updated: October 29, 2008 16:41 EDT