July 27, 2011 – By David Henry
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NEW YORK (Reuters) - Moody's Corp <MCO.N>, 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 more difficult.
The company, which sent 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 U.S. debt ceiling continue. New junk bond issuance was 67 percent less.
"We expect more challenging debt issuance conditions in the U.S. 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.
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Revenue will still grow, but more slowly, McDaniel added later in a conference call with analysts.
Moody's shares fell $1.97, or 5.3 percent, to close at $35.45.
The company has played an indirect 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.
McDaniel told analysts that if U.S. debt is downgraded there will be "some market dislocation" that will cause companies to back away from issuing debt that Moody's is paid to rate. He did not comment on the likelihood that Moody's will cut its rating on the United States.
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 drop-off in bond issuance.
The company raised its full-year profit forecast after earning more than it expected during the quarter. The company said it expects to earn $2.38 to $2.48 a share this year, up from its previous outlook 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 U.S. revenue.
European companies are not as far along refinancing high-cost debt as U.S. 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 Chief Financial Officer Linda Huber told analysts that 70 percent of its cash is overseas and not available for buybacks. Moody's was blocked recently from buying its own stock until it made public its new earnings outlook, she said, adding that the company will resume repurchases now.
Moody's is 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 U.S. 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.
The U.S. Congress has mandated new regulations to reduce the power and profits of the agencies. But the new rules, according to Lawrence White, a professor at New York University and a long-time critic of the major ratings agencies, are a long way from having any bite.
For at least the next year or two, the rules are less of a threat to the profits of the companies than is the slowdown in private borrowing through the bond markets, he said.
"Things move slowly" in Washington, White said in an interview. "There is a lot inertia and the regulators have been dilly-dallying far too long."
(Editing by Dave Zimmerman, Robert MacMillan, Gary Hill)