By Caroline Salas
July 29 (Bloomberg) -- Moody’s Corp., whose founder John Moody created credit ratings in 1909, reported a 19 percent drop in second-quarter profit as the worldwide economic slowdown damped demand for debt rankings.
Net income fell to $109.3 million, or 43 cents a share excluding some items, from $135.2 million, or 51 cents, a year earlier, New York-based Moody’s said today in a statement. The average estimate of six analysts surveyed by Bloomberg was for income of 40 cents a share.
Sales of asset-backed securities, such as collateralized debt obligations, have declined during the worst financial crisis since the Great Depression, curbing demand for the services of Moody’s and rival Standard & Poor’s, the two biggest rating companies. S&P’s parent, McGraw-Hill Cos., reported yesterday that revenue at its credit-market services unit fell by 9.9 percent, and that it cut its sales forecast for 2009.
“We saw issuance of certain types of securities, mainly CDOs and asset-backed debt, fall dramatically in 2008 and it has not picked up this year,” saidJuan Esteban Valencia, a credit strategist at Societe Generale SA in London. Credit raters “will no doubt be reorienting their business models to fit this new credit environment, where issuance of investment-grade bonds is at very good levels, but structured products are minimal.”
Moody’s revenue declined 8 percent to $450.7 million, the ratings company said. The firm raised its forecast for 2009 earnings to $1.45 to $1.55 a share, compared with $1.87 in 2008. Moody’s forecast earnings per share of $1.40 to $1.50 when it reported its first-quarter results. Analysts have anticipated adjusted earnings per share of $1.56, according to the Bloomberg survey.
Shares Fall
Moody’s, led by Chief Executive Officer Raymond McDaniel, fell $2.10, or 7.6 percent to $25.52 in New York Stock Exchange composite trading. Shares of McGraw-Hill, which reported a 23 percent drop in its second-quarter profit yesterday, fell 87 cents, or 2.6 percent, to $32.23.
“The drivers of growth have been limited,” McDaniel said on a conference call with analysts today. “So far this year, we’ve only seen strength coming out of the corporate finance sector and some parts of infrastructure finance.”
McDaniel said he “remains cautious” about Moody’s outlook for 2009 because corporate bond issuance may decline. Companies already took advantage of “windows of opportunity” in the first half of the year to refinance maturing debt, so the pace of debt sales may slow, he said.
Berkshire Sells
Gross issuance of corporate debt in the second half of 2009 will be less than 50 percent of the amount sold in the first six months of the year, JPMorgan Chase & Co. analysts led by Eric Beinstein said in a July 27 report.
Warren Buffett’s Berkshire Hathaway Inc., Moody’s largest shareholder, disclosed in a regulatory filing last week that it cut its stake in the firm by 17 percent by selling about 8 million shares. Omaha, Nebraska-based Berkshire remains Moody’s largest shareholder, according to data compiled by Bloomberg.
Moody’s, S&P and Fitch Ratings have been criticized by investors and lawmakers including Senate Banking Committee Chairman Christopher Dodd, who has said the companies wrongly assigned top credit rankings to U.S. subprime-mortgage bonds just before that market collapsed in 2007.
Buffett himself has said Moody’s damaged its brand as ratings proved inaccurate. Moody’s shares have tumbled from a peak of $74.84 in February 2007.
‘Wild Card’
Some areas of the market for bond issuance have rebounded in the first half of the year. Investment-grade companies in the U.S. issued a record $683 billion of bonds through June, 26 percent more than in the same period of 2008, Bloomberg data show. Sales of junk bonds, those rated lower than Baa3 by Moody’s and BBB- by S&P, climbed 23 percent to $61.7 billion in the first six months of 2009, the data show.
“Corporate finance has been better, but the real wild card is structured finance,” said Edward Atorino, an analyst at Benchmark Co. in New York, who recommends investors buy Moody’s stock and anticipated earnings of 36 cents a share.
Within Moody’s ratings business, global structured finance revenue fell 35 percent to $74.6 million in the second quarter, the company said. Its global corporate finance revenue climbed 9 percent to $107.5 million from the same period of 2008.
Creation of asset-backed securities including auto-loan bonds and credit-card debt slumped 44 percent to $76.6 billion in the first half of this year, Bloomberg data show.
McGraw-Hill shares have climbed 39 percent this year, and Moody’s is up 27 percent.
To contact the reporter on this story: Caroline Salas in New York atcsalas1@bloomberg.net
