Raymond McDaniel, the chief executive of Moody’s, on Friday tried to assuage shareholder fears that his rating agency could be the next target of the US government, which is suing rival Standard & Poor’s for alleged fraud over faulty credit ratings before the financial crisis.
“We don’t know of any pending complaint from the Department of Justice raising similar claims against us,” Mr McDaniel told analysts on a conference call to trumpet a 66 per cent year-on-year rise in Moody’s fourth-quarter net income.
While the surge in global corporate bond issuance helped Moody’s record a 33 per cent increase in revenues in the quarter, and it predicted forecast-busting earnings this year, the threat of crisis-era litigation continued to weigh on the stock.
But its shares, already down 15.1 per cent since the action against S&P was disclosed on Monday night, fell a further 7.7 per cent to close at $43.37 on concerns that the New York attorney-general, Eric Schneiderman, and other state prosecutors were weighing legal action against Moody’s.
The DoJ action this week raised questions as to why S&P was being targeted and not Moody’s. The investigation into S&P is far advanced and is built on a trove of internal email correspondence regarding ratings modelling. S&P is accused of delaying or adjusting model changes so as to keep generating high ratings on mortgage securities, even while the US housing market was crumbling.
S&P may face widening litigation as states investigate the company and consider bringing new cases that would add to more than a dozen across the country, according to people close to the investigation. Mr Schneiderman and Massachusetts attorney-general Martha Coakley are conducting probes.
Many of the emails have been in the public domain for several years. Hearings for a 2011 report by the Senate’s permanent subcommittee on investigations, which concluded the agencies were bullied by bankers into inflating ratings, made reference to extracts from 61 S&P emails. There were 30 Moody’s emails quoted.
Mr McDaniel pointed to Moody’s regulatory disclosures in the last year which said the company was “the subject of intense scrutiny, increased regulation, ongoing investigation, and civil litigation”. The company would disclose any specific investigation that was material, he said.
The company took a $21.5m charge in the fourth quarter to cover legal costs related to two outstanding civil cases filed by investors who lost money on mortgage-related bonds given high ratings by Moody’s. One case, by the Abu Dhabi Commercial Bank, is due to go to trial in May. Moody’s denies fraudulently inflating its ratings to win business from issuers.
“Legal risks are real, but defences appear to be strong,” Lazard Capital Markets analyst William Bird told clients. “The legal pile-on is reminiscent of 2010 when initial suits were followed by a wave of additional suits and a highly charged political atmosphere.”
The company’s earnings per share guidance for 2013, of between $3.45 and $3.55, was sharply higher than the Wall Street consensus of $3.25. Fourth-quarter revenue was up 33 per cent to $754.2m and net income in the quarter rose to $160.1m from $96.2m a year earlier.
It made $244.9m in revenue from rating investment grade and corporate bonds in the three months to 31 December, a 73 per cent increase on the same period in 2011, as issuers rushed to take advantage of historically low interest rates.
The structured finance division, whose pre-crisis ratings on many mortgage-related derivatives turned out to be too optimistic, also returned to rude health, at least in the US. Revenue from the US in this division was up 50 per cent, although it declined in Europe where issuance of complex bonds, such as collateralised loan obligations and commercial mortgage-backed securities, remains weak.
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