Moody's to Raise Rating Fees to Offset New Rule Costs, Piper Jaffray Says

Moody’s Corp. plans to raise prices to grade debt by about 5 percent to offset increased regulatory and compliance costs, according to Piper Jaffray & Co.

Moody’s will increase fees in the “mid-single-digit range,” Piper Jaffray’s Peter Appert wrote today in a note to clients, after the San Francisco-based analyst met with Chief Executive Officer Raymond McDaniel and Chief Financial Officer Linda Huber. A 5 percent price increase would raise about $67 million in revenue for Moody’s, the analyst said.

The ratings company may raise fees as borrowers seek to refinance as much as $6 trillion in debt over the next five years. Moody’s expects $10 million to $15 million in increased regulatory costs after passage of the Dodd-Frank Act in July, which contains changes to how credit ratings companies can operate.

“Ironically, higher compliance costs and a tighter regulatory environment likely further cement the dominant positions” of Moody’s and Standard & Poor’s in the ratings industry as smaller players find it difficult to manage these requirements, Appert said.

S&P, a unit of McGraw-Hill Cos., expects $16 million in new costs related to the legislation, Appert said. Both ratings companies are based in New York.

Moody’s spokesman Michael Adler couldn’t immediately comment on the note.

Regulation Overhaul

There is “strong investor appetite for debt securities” right now as low interest rates and narrow differences in the price to buy and sell bonds are pushing demand for investment- grade and high-yield issuance, Appert said. Refinancing needs of $5 trillion to $6 trillion in debt bode well for the stocks, which he rates as “overweight.”

Ratings companies Moody’s, S&P, and Fitch Ratings 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.

The U.S. financial-regulation overhaul enacted July 21 led ratings companies to tell Wall Street that they will no longer let underwriters use ratings in asset-backed bond-registration statements because of increased risk of being sued. The new rules eliminated credit-rating companies’ shield from lawsuits when underwriters include their assessments in documents used to sell debt.

The Securities and Exchange Commission said two days later that companies could omit ratings from regulatory documents for six months to give market participants a transition period to comply with new laws.

Biggest Threat

Moody’s share price has declined 6.7 percent this year through Sept. 17 while McGraw-Hill has lost 8.8 percent. Moody’s rose 76 cents, or 3 percent, to $25.76 as of 11 a.m. in New York Stock Exchange composite trading. McGraw Hill gained 41 cents, or 1.3 percent, to $30.96.

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, Appert said in July.

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 SEC, according to Appert.

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

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