Moody's profit beats on bond issuance

NEW YORK: Moody's Corp, owner of one of the three major debt-rating agencies, reported a 56 percent rise in second-quarter profit, but cautioned that the second half of the year would be difficult.

The company, which was sending a top executive to testify in Washington on Wednesday about rating agencies' roles in the financial crisis, counted higher profits in the second quarter because debt issuance rose from the same quarter a year ago.

But global corporate debt issuance stalled in June, and July appears weaker, according to Thomson Reuters data.

The value of investment-grade corporate bond issues through July 26 was 44 percent lower than in June as the Greek debt crisis and political wrangling over the US debt ceiling continue. New junk bond issuance was 67 percent less.

"We expect more challenging debt issuance conditions in the US and Europe in the second half of 2011 as compared to the first half of the year," Chief Executive Raymond McDaniel said in the announcement.

Moody's shares fell 4 percent to $35.91 in morning trading.

The company has played an accidental part in depressing bond issuance. As the agency has taken steps like warning that it may change the outlook on the United States' triple-A rating, and cutting sovereign ratings for Ireland and Portugal, some corporate bond issuers have grown reluctant to sell debt.

Moody's reported net income of $189 million, or 82 cents a share, compared with $121 million, or 51 cents a share, a year earlier. Revenue was $605 million, up 27 percent.

Stripping out a tax benefit, the company earned 79 cents per share, beating analysts' average estimate by 22 cents per share, according to Thomson Reuters I/B/E/S.

Revenues were also better than expected, rising 5 percent from the first quarter even after a dropoff in bond issuance.

The company raised its full-year profit forecast after earning more than it expected during the quarter. The company said expects to earn $2.38 to $2.48 a share this year, up from its previous guidance of $2.22 to $2.32.

Moody's shares have risen 41 percent through Tuesday, but have leveled off because of a drop in the volume of new corporate bonds to rate.

Many companies have used up their opportunities to refinance debt to get lower interest rates and have little appetite for more borrowing.

The latest results suggest that rating agencies' prospects may be better outside the United States. Moody's second-quarter international revenue was up 34 percent from last year, compared with a 20 percent increase in US revenue.

European companies are not as far along refinancing high-cost debt as US companies, said Evercore Partners analyst Douglas Arthur.

Moody's built up its cash during the quarter rather than buying back stock. Cash and equivalents rose to $938 million at the end of June from $720 million three months earlier. The company did not repurchase stock despite having $1.1 billion left on a buyback authorization from the board.

Moody's is also under intense and costly regulatory scrutiny in the United States and Europe, Arthur said.

"They are still adding a ton of people lawyers, compliance people, industry experts and supervisory analysts to do a better job," he said.

Rating agencies have been at the forefront of debt crises in the United States and Europe. They downgraded Greece's debt and threatened to lower ratings on US government obligations. Politicians in both regions have criticized the agencies for making the problems worse after helping create the financial crisis.

The agencies fueled excessive lending and the housing bubble by putting undeserved triple-A ratings on mortgage-related securities. Many top-rated securities later defaulted.

The agencies made hundreds of millions of dollars rating structured finance products linked to mortgages.

Copyright Reuters, 2011