We are now at the point where one can only sit back and cackle as the insanity unravels. The president earlier agreed with his supervisor that the Economy is doing swell on a day when the market posted the 5th highest TRIN rating in history, the ECB is saying all is well even as Europe is about to implode, and now, S&P has just announced it has put Moody's on creditwatch negative, the reason: "We believe there may be added risk to U.S.-based credit rating agency Moody's business profile following recent U.S. legislation that may lower margins and increase litigation related costs for credit rating agencies." Just so you understand what is going on here - S&P: a credit rating agency, is downgrading Moody's, a credit rating agency, on concerns finreg will impair credit rating agencies. Well, if "suiciding" your chief competitor is the best way to approach this situation, whatever works... Next week, Moody's downgrades S&P, followed by another downgrade of Moody's by S&P, until both companies bankrupt each other with a mutual D rating. John Nash would be so proud.
Full press release:
- We believe there may be added risk to U.S.-based credit rating agency Moody's business profile following recent U.S. legislation that may lower margins and increase litigation related costs for credit rating agencies.
- We are placing our 'A-1' short-term rating for Moody's on CreditWatch with negative implications.
- We expect to resolve the CreditWatch listing in the near term.
On June 29, 2010, Standard & Poor's Ratings Services placed its 'A-1' short-term rating for Moody's Corp. on CreditWatch with negative implications.
The CreditWatch listing reflects our view that an increased level of business risk is likely following the announcement that the Financial Reform Conference Committee has reconciled bills from the U.S. Senate and House, and that the agreed upon legislation could result in a change in the applicable pleading standards for certain litigation brought against rating agencies. According to our ratings criteria, we place ratings on CreditWatch when, in our view, there is a 50% chance or more of a rating change, and CreditWatch reviews can be the result of regulatory changes' impact on an issuer's business.
The agreed upon legislation contains a provision whereby investors may be able to sue rating agencies if they can show that the agency knowingly or recklessly failed to conduct a reasonable investigation of the factual elements relied upon by a credit rating agency's rating methodology, or obtain a reasonable verification of those factual elements from independent third-party sources. While we believe it is likely that the new pleading standard will lead to an increase in litigation-related costs at Moody's, whether the new pleading standard would potentially increase the likelihood of successful litigation against Moody's will be determined in the future by the courts. Moody's management has stated that it plans to adapt its business practices in an effort to partially offset any potential new litigation risks associated with the legislation. Nevertheless, we believe that Moody's may face higher operating costs, lower margins, and increases in litigation-related event risk, which would likely increase its business risk (see discussion under Litigation in our Encyclopedia of Analytical Adjustments for Corporate Entities--part of our Corporate Ratings Criteria).
In addition, if the final legislation removes many or all references to nationally recognized statistical rating organizations (NRSROs) from federal regulations, it may reduce investor demand for ratings. While we believe the latter change is unlikely to meaningfully impair Moody's business position over the near term, we plan to consider its long-term impact. As per our criteria, greater business risk and lower profitability would be key factors in a potential downward revision of our evaluation of Moody's business profile or a potential rating downgrade. In addition, Moody's business will likely undergo noticeable changes due to new global regulations and the U.S. legislation's impact on industry risk, which are business risk considerations under our criteria.
While a potential weakening of Moody's business profile is the driver for our CreditWatch listing, we will also consider the potential longer-term impact on the company's financial profile (see our business and financial risk profile matrix under the Analytical Methodology section of our Corporate Ratings Criteria). The company currently has a strong financial profile, in our view, as demonstrated by good levels of profitability, a high level of conversion of its EBITDA generation to discretionary cash flow, low leverage, and high cash balances. At March 2010, Moody's EBITDA margin was 46%, the company's conversion of EBITDA to discretionary cash flow was 45%, our measure of total lease-adjusted debt to EBITDA was 2.0x, and cash balances were $504 million.
We anticipate resolving the CreditWatch listing over the near term, following our review of the final legislation and its potential long-term impact on Moody's business position. In the event of a rating downgrade, we do not anticipate the short-term rating would be lowered to below 'A-2'. An affirmation of the current 'A-1' commercial paper rating would likely involve a conclusion that the final legislation and new global regulations would not increase risk to Moody's business position.