Moody’s stated that legal or tax issues may have a material impact on a quarter’s results, even if none of these issues are expected to have a materially negative impact on the company’s overall condition.  Moody’s is feeling the pressure from a series of regulatory probes against its rating practices such as rating policies for mortgage debt instruments and offering of unsolicited ratings. 

Moody’s released its third quarter earnings, showing a 7% decline in operating income and earnings per share (EPS). The company did have an increase of 6% in recorded revenue over Q3 2006, up from $495.5 million to $525 million.  But Moody’s net income toppled 13% from $157 million in the third quarter of 2006 to $136.9 million this year, primarily on the back of subprime mortgage defaults.  This was also reflected in the slight slip from $310.3 million to $306.6 million in domestic revenues. U.S. structured finance revenue fell 14%, though strong growth from commercial mortgage-backed securities provided a backstop for declines seen across all other asset classes, notably a 52% decrease in revenue from rating residential mortgage-backed securities.

“Based on expectations of continued weakness in the debt markets, we are revising our 2007 earnings guidance downward,” said Raymond McDaniel, Moody’s chairman and CEO. “We now expect full year revenue to grow in the high-single-digit to double-digit percent range. Given this revised outlook, we are moving aggressively to reduce expenses and expect to record a restructuring charge in the fourth quarter.”

The move in reductions will likely include job cuts. The company’s operating costs rose double digits in the third quarter and Moody’s is projecting that full-year operating margin, excluding any 2007 restructuring charge or the one-time gain of its building in 2006, will fall by approximately 220 basis points. Source: Reuters and NACM

BIIA Newsletter November – 2007 Issue