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,” said Juan 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 anticipated adjusted earnings per share of $1.56, according to the Bloomberg survey.
Moody’s, led by Chief Executive Officer Raymond McDaniel, fell 85 cents, or 3.1 percent to $26.77 as of 10:34 a.m. in New York Stock Exchange composite trading. Shares of McGraw-Hill, which reported a 23 percent drop in its second-quarter profit yesterday, fell 70 cents, or 2.1 percent, to $32.40.
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.
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, according to data compiled by Bloomberg. 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.
As a result of the increased corporate issuance, McGraw- Hill said it now expects transaction revenue at its S&P unit to show a “mid-single digit decline” in 2009, compared with previous expectations of a 10 percent to 12 percent drop.
“There were signs of a thaw in this year’s second quarter,” McGraw-Hill Chief Executive Officer Terry McGraw said on a conference call with analysts yesterday. “There is a greater willingness of investors to take on some risk. That trend undoubtedly contributed to the 82.6 percent increase in U.S. speculative-grade issuance in the second quarter.”
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.
“The outlook for structured finance for the rest of the year remains uncertain,” McGraw said on the call. “Even though the structured finance market declined again in the U.S. and in Europe, the impact of the corporate activity on S&P’s credit market services transaction revenue was significant.”
McGraw-Hill shares climbed 43 percent this year through yesterday, and Moody’s was up 37 percent.
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