Moody's outlook

By Kerry Grace Benn DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Shares of Moody's Corp. (MCO) and McGraw-Hill Cos. (MHP) remain under a cloud after bad news this week, though analysts say they see the slide as a buying opportunity.

The shares' decline comes after an unfavorable court ruling this week versus the companies' ratings agencies and Warren Buffett's Berkshire Hathaway Inc. (BRKA) pared its stake in Moody's for the second time since late July.

Analysts at Piper Jaffray said in a note to clients that the controversy could be an opportunity, adding their enthusiasm for the shares of both companies was based on rebounding credit-market issuance volumes, which drive revenue and earnings; easing regulatory worries; their belief that litigation risk "will prove manageable" and appealing valuations.

Moody's shares were up 10 cents at $24.36 in recent trading after losing 7.1% Thursday, while McGraw-Hill's were up 22 cents at $29.23 after dropping 10% Thursday. In the last month, the stocks are off 2.9% and 6%, respectively.

A federal judge ruled the ratings agencies, Moody's Investors Service and McGraw-Hill's Standard & Poor's Ratings Services, must defend a lawsuit over the collapse of a $5.86 billion structured investment vehicle in 2007. The judge threw out 10 of the 11 claims against the companies.

The firms had long argued that their ratings of securities were constitutionally protected opinion. But a federal judge ruled Wednesday that the ratings of certain securities - those that are distributed to a limited number of investors - don't deserve the same free-speech protection as more general ratings of corporate bonds that were widely disseminated.

The ruling is expected to spur more lawsuits and could apply to structured investment vehicles once valued as high as $400 billion.

Benchmark Co. analyst Edward Atorino said it's unfortunate the ruling happened, as business is getting better faster than expected in terms of new bond issuance for the two ratings agencies. But one claim going forward "really casts a pall over the stocks," he said.

Atorino said the companies in the past have always managed to successfully defend themselves against all kinds of charges, adding he thinks it's pretty difficult to prove fraud in cases like this one. They have been able to convince courts and juries that they provide opinions and aren't telling people to buy or predicting value, he said.

In a separate note, Piper Jaffray said that contrary to the market's negative response, "we believe the decision has little implication for the eventual outcome of the case or the ability of the rating agencies to rely on freedom-of-speech defense in ongoing litigation." The firm reiterated its overweight rating on both companies and said it would use the weakness to buy shares.
John Eade, an analyst at Argus Research Co. who only covers McGraw-Hill, said he thinks McGraw-Hill and Moody's will likely win the cases for First Amendment reasons and because the business "has been basically approved by Congress and integrated into the financial system over the past few decades to the point where certain pension funds are required to buy rated bonds."

He added he doesn't think the companies will be found guilty, but said the business model could change in two ways - first with the addition of new competitors if the government makes it easier for firms to achieve the Nationally Recognized Statistical Rating Organization status required to become a ratings agency, giving investors more choice.

The second possible change could be asking investment managers to pay for the ratings service - if that occurred, Eade said, the investors might have a better case to sue if they thought they had gotten bad advice. "I don't know how the government could mandate that," he said.

Meanwhile, Berkshire Hathaway sold 794,388 Moody's shares this week, or about 0.3% of the company's outstanding shares, at prices from $26.30 to $27.74. Buffett has weathered criticism in the past year for his stake in Moody's, because Moody's Investors Service is one of the ratings agencies that has been criticized for the top grades it had issued to mortgage-backed securities that later underperformed.

Buffett cut his Moody's stake by 8 million shares in mid-July, reducing his stake to about 40 million shares. He said at the time that he might decide to sell more shares.
-By Kerry Grace Benn, Dow Jones Newswires; 212-416-2353; kerry.benn@dowjones.com

Bilibala comments:
After the financial crisis, the market actually need more (instead of less) consultant and credit rating service to make sure an particular fixed income product or an corpration should be.
So Moody and McGraw-Hill should be able to get more business than ever in future.

However, in short term, given the financial market is still in the "de-leveaging" stage (at least less underwriting activities is done.) So may be for the next few years, revenue growth will still under pressure.

Warren Buffett's move is understandable, he reduce sake in Moody down below 20% so that he doesn't have to use equity method to report Moody's earning in Berkshire Hathaway's book. It will help him to smooth the bottom line to be less volatile.