Moody’s Earnings Exceed Estimates on Higher Research Demand

Moody’s Corp., owner of the second-largest credit-grader, reported first-quarter profit that beat analysts’ estimates as demand increased for the company’s market research and a junk-loan boom boosted ratings revenue.

Net income rose to $218 million from $188.4 million a year earlier, the New York-based company said today in a statement distributed by Business Wire. Earnings excluding certain items were $1 per share, exceeding the average estimate of 91 cents in a Bloomberg survey of 12 analysts.

Moody’s Investors Service, along with competitors Standard & Poor’s and Fitch Ratings, is benefiting after historically low borrowing costs spur debt sales that expanded the global bond market by 40 percent over six years to $100 trillion. The debt graders, blamed in congressional reports for contributing to the financial crisis by inflating ratings, are maintaining their grip on the business even after regulators imposed rules intended to curb the influence they have over the market.

Corporate bond sales in the U.S. slowed to $412.6 billion in the three months ended March 31 from $424.3 billion a year earlier, according to data compiled by Bloomberg. Since 2008, Moody’s has reported five straight annual increases in revenue.

Loan Demand

A slowdown in speculative-grade company bond offerings was “offset by the strength in the bank loan area,” Chief Executive Officer Raymond McDaniel, said on an earnings call with analysts and investors today. “I expect we’re going to continue to see that.”

Issuance of new U.S. leveraged loans climbed 35 percent to $92.6 billion in the first quarter, up from $68.6 billion a year earlier, according to data compiled by Bloomberg.

Moody’s said revenue rose 4.8 percent to $767.2 million for the quarter, from $731.8 million in the equivalent period of 2013. Sales from Moody’s Analytics, which distributes research and data, climbed 14.6 percent to $241.4 million.

Excluding the acquisition in December of Amba Investment Services, a provider of investment research and quantitative analytics, revenue from Moody’s Analytics rose 10 percent, the New York-based company said in the statement.

The company reaffirmed its 2014 guidance for a “high-single-digit” percent increase in revenue. Earnings per share will be in a range of $3.90 to $4, according to the statement.

Total sales from Moody’s Investors Service, which account for about 70 percent of the firm’s revenue, rose to $525.8 million from $521.2 million. Corporate debt ratings revenue climbed to $264.4 million from $258.3 million. Sales from structured finance ratings rose to $95.3 million from $93 million and rankings for financial institutions fell to $85.4 million from $86.5 million.

Quarterly Dividend

With dividends reinvested, shares have returned 1.2 percent this year to close at $79.13 today, compared with the 1.4 percent rise in the Standard & Poor’s 500 Index. Moody’s returned 58.2 percent last year, compared with the S&P’s 32.4 percent gain.

In a separate statement, Moody’s declared a regular quarterly dividend of 28 cents per share.

Competitor McGraw Hill Financial Inc., owner of the largest credit-rating company, is scheduled to report first-quarter earnings April 29.

The Federal Reserve has held its target rate for overnight loans among banks between zero and 0.25 percent since December 2008 to spur economic growth after the longest recession since the 1930s.

Business Model

The credit-grading business was targeted by lawmakers in the 2010 Dodd-Frank Act after the collapse of mortgage-backed securities contributed to $2.1 trillion in writedowns and losses at financial firms globally. Ratings cuts on top-rated bonds tied to sub-prime debt helped wipe out almost $11 trillion of household wealth, the Financial Crisis Inquiry Commission said in its 2011 report.

There has been no change to the business model, in which issuers pay the companies for their grades.

Yields on debt from the most credit worthy to the riskiest U.S. borrowers averaged 3.92 percent in the past year, below the five-year average of 4.75 percent, according to the Bank of America Merrill Lynch U.S. Corporate & High Yield Index.

Warren Buffett’s Berkshire Hathaway Inc. is Moody’s biggest shareholder with an 11.5 percent stake valued at about $2 billion, Bloomberg data show.

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