Moody's Shares Advance as Profit Beats Estimates on U.S. Ratings Business

Moody’s Corp., one of the bond raters that’s refusing to allow its opinions to be used in asset-backed securities offerings due to new legal risk, rose as much as 6.8 percent after reporting profit that beat analyst estimates.

Net income climbed to $121 million, or 51 cents a share, from $109.3 million, or 46 cents, a year earlier, New York-based Moody’s said today in a statement. Excluding tax and restructuring costs, the company earned 49 cents a share, which compares with 44 cents, the average forecast of six analysts surveyed by Bloomberg.

The increase was led by strong U.S. ratings services, the company said. Revenue for Moody’s Investors Service grew 5.9 percent, led by a jump in business for rating U.S. corporate debt. Moody’s earned $127.9 million from rating U.S. corporate bonds in the quarter, up 19 percent from the year-earlier period.

The gain was “driven primarily by strong high-yield bank loan origination, which more than offset reduced issuance in the investment-grade market,” the company said in the statement.

U.S. issuance was off 23 percent while international bond offerings fell 33 percent, compared with the second quarter of 2009, analysts led by Peter Appert of Piper Jaffray & Co., said in a note to clients this month.

“Economic turmoil in Europe and a related uptick in credit spreads” slowed issuance in the quarter ended June 30, compared with the similar period a year ago, the analyst said.

Stock Rises

Moody’s rose $1.26, or 5.6 percent, to $23.90 of 10:36 a.m. in New York Stock Exchange composite trading. The stock traded as high as $24.17 earlier in the day. The shares had dropped 16 percent this year through yesterday.

The U.S. financial-regulation overhaul, signed into law by President Barack Obama on July 21, led Moody’s Investors Service and Fitch Ratings to tell Wall Street that because of increased risk of being sued, they will no longer let underwriters use ratings in asset-backed bond-registration statements. The new rules eliminated credit-rating companies’ shield from lawsuits when underwriters include their assessments in documents used to sell debt.

The company, whose founder John Moody created credit ratings in 1909, said total revenue increased 6 percent to $478 million.

2010 Forecast

Moody’s reiterated its forecast for 2010 earnings per share of $1.75 to $1.85. Analysts anticipate adjusted earnings of $1.82, according to a Bloomberg survey. The company expects 2010 revenue to increase in the “mid-single-digit percent range,” down from a “high-single-digit percent range” it forecast in its earnings statement in April.

Ratings companies Moody’s, Standard & Poor’s and Fitch have faced congressional and state-regulator scrutiny after they assigned top marks to U.S. subprime-mortgage bonds just before that market collapsed in 2007. Moody’s, led by Chief Executive Officer Raymond McDaniel, has fallen 67 percent from the start of 2007 through the week ended July 23.

Within Moody’s ratings business, global structured finance revenue fell 2 percent to $73.1 million in the quarter, the company said. The Moody’s Analytics unit saw revenue climb 6.3 percent to $149.2 million. Outside the U.S. the company’s sales rose 1.3 percent, compared with a U.S. increase of 10.3 percent.

New Rules

The biggest threat to Moody’s and other raters’ business from the new financial rules is a lowered threshold in liability standards they face against investors who sue the firms, according to Appert at Piper Jaffray.

“The lower pleading standard is aimed at making litigation a credible deterrent and creates an incentive for the rating agencies to strengthen their due diligence efforts,” the analyst wrote in a July 21 note to clients.

Another effect of the new laws is a mandate for the removal from all government rules and regulations of any references to Nationally Recognized Statistical Rating Organizations, a designation given to credit-rating companies by the Securities and Exchange Commission.

Appert said the new legal risk for credit raters in asset- backed deals is “low.”

“From a practical standpoint, we believe this change will have no impact as we anticipate that the rating agencies will no longer allow the publication of ratings in prospectuses,” he said in the July 21 note. “Investors will instead have to track ratings via the agencies’ websites, publications or other sources.”

(Moody’s will hold a conference call for analysts and investors at 11:30 a.m. New York time. To listen, access the company’s Web site at http://ir.moodys.com)

To contact the reporter on this story: Matthew Leising in New York at mleising@bloomberg.net

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