Wednesday, April 23, 2008

Why Moody's is up

Moody's net falls 31 pct, ratings demand tumbles

Wed Apr 23, 2008 8:02am EDT

By Jonathan Stempel

NEW YORK (Reuters) - Moody's Corp (MCO.N: Quote, Profile, Research), the parent of Moody's Investors Service, on Wednesday said quarterly profit fell 31 percent, a smaller decline than expected, as market turmoil depleted demand for rating mortgages and structured credit products.

Net income fell to $120.7 million, or 48 cents per share, from $175.4 million, or 62 cents per share, a year earlier. Operating profit fell 35 percent to $199.3 million.

Revenue dropped 26 percent to $430.7 million, including a 57 percent slump from structured products, which include such things as collateralized debt obligations and complex debt.

Analysts on average had expected a profit of 35 cents per share on revenue of $416.9 million, according to Reuters Estimates.

"Revenue results in the first quarter clearly reflect the difficult credit market conditions in which we are operating," Chief Executive Raymond McDaniel said in a statement. "We remain cautious about the likely pace and strength of recovery in credit markets in 2008."

Moody's still expects 2008 profit per share of $1.90 to $2.00, with revenue declining by a mid- to high-teens percentage. It lowered its forecast to that level on March 11.

The New York-based company said it expects weakness to continue this quarter, with "modest improvement in market liquidity and issuance conditions" later in the year.

Moody's and McGraw-Hill Cos Inc's (MHP.N: Quote, Profile, Research) Standard & Poor's have suffered as the housing crisis has caused demand to disappear for a wide variety of debt, thereby reducing demand for ratings.

Those agencies, and to a lesser extent Fimalac SA's (LBCP.PA: Quote, Profile, Research) Fitch Ratings, have been criticized for assigning high, often "triple-A," ratings to risky securities, and then cutting ratings too fast once they realized they erred.

On Tuesday, U.S. Securities and Exchange Commission Chairman Christopher Cox said his agency is examining public disclosures on structured products, and how rating agencies managed conflicts of interest.

Major rating agencies are paid by issuers whose securities they rate. Lawmakers in Congress have called on the SEC to tighten oversight. State attorneys general have also been inquiring into the industry.

Moody's has said it might change how it rates structured products. This could lead to Moody's ditching its 21 letter grades, which range from "Aaa" to "C," for numerical ratings.

Billionaire Warren Buffett's Berkshire Hathaway Inc (BRKa.N: Quote, Profile, Research) (BRKb.N: Quote, Profile, Research) is Moody's largest investor, with a 19.5 percent stake at year-end, according to Thomson ShareWatch.

Moody's shares closed Tuesday at $38.17 on the New York Stock Exchange. Through Tuesday, the shares had risen 2 percent this year, but were down 50 percent from their 52-week high set last May 31.

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