Moody’s profit down 48%, ratings demand shrinks
Moody’s Corp, the parent of Moody’s Investors Service, said on Wednesday quarterly profit fell 48%, as the year-long credit crisis caused demand to shrink for mortgage bonds and collateralized debt obligations.
Results nevertheless topped analyst forecasts. On Tuesday, McGraw-Hill Cos, which operates Moody’s main rival Standard&Poor’s, posted a smaller-than-expected 23% decline in quarterly profit. Both companies also affirmed their 2008 earnings forecasts.
Second-quarter net income for New York-based Moody’s, whose largest investor is Warren Buffett’s Berkshire Hathaway Inc, fell to $135.2 million, or 54 cents per share, from $261.9 million, or 95 cents, a year earlier. Moody’s said profit excluding items was 51 cents per share. On that basis, analysts on average expected 47 cents per share, according to Reuters Estimates. Revenue fell 25% to $487.6 million, topping the average $465.7 million forecast.
Profit and revenue increased from the Q1, and Moody’s still expects 2008 profit of $1.90 to $2.00 per share, with revenue down by a mid- to high-teens percentage. Analysts expected profit of $1.92 per share for the year. “They beat the numbers in pretty much in all categories,” said Edward Atorino, an analyst at Benchmark Co in New York. “I think we’re bouncing along the bottom. The third quarter is starting pretty slow, but we’re at the bottom of a trough.”
Results were weakened by a 56% plunge in revenue from CDOs and other structured products, including such asset classes as residential mortgage-backed securities, commercial real estate finance and credit derivatives. In the United States alone, structured finance revenue fell 67%. Expenses declined 10% as Moody’s cut jobs and reduced incentives and stock-based compensation. Shares of Moody’s closed Tuesday at $36.15 on the New York Stock Exchange. They have risen 1% this year, but have fallen 52% from a peak of $76.09 in February 2007.
Moody’s and S&P have suffered as the housing slump and credit crisis caused demand to disappear for a wide variety of debt, and thus ratings. Critics have said Moody’s, S&P and Fimalac SA’s Fitch Ratings assigned high ratings to risky securities, only to later cut those ratings too fast. Financial companies have absorbed well over $400 billion of write-downs and credit losses since the credit crunch began.
Moody’s in May announced a probe into whether it wrongly assigned “triple-A” ratings to complex European products known as constant proportion debt obligations (CPDOs), and failed to change the ratings for nearly a year after finding the error.
The same month, Moody’s replaced COO Brian Clarkson, who drove its expansion in structured finance. In July, Moody’s removed structured finance chief Noel Kirnon. Also in July, the US Securities and Exchange Commission said evidence showed that one rating agency let analysts take part in fee discussions with issuers, and another let analysts weigh whether their ratings could trigger client defections. Berkshire had a 19.6% stake in Moody’s as of March 31, according to Thomson ShareWatch. (Reuters)
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