Moody’s

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Calling all farmyard animals. Material presented to the US Congress last week suggested that credit ratings agencies were less than picky about who (or what) structured deals in the good times. Analysts from Standard & Poor’s made the now-infamous remark that the agency would rate a deal “structured by cows”, but results on Wednesday from Moody’s underlined the agencies’ latest challenge. US structured finance revenues fell by 65 per cent, on a dearth of issuance, as overall revenues dropped 17 per cent on the third quarter of last year.

Expectations were sufficiently dismal, however, for Moody’s to beat forecasts. No matter – the outlook becomes ever worse. The agency is more dependent on debt issuance than S&P, which benefits from education and media businesses. With spreads on investment grade industrial debt approaching levels not seen since the 1930s, there is little hope of a recovery before year’s end in spite of a backlog in issuance. International markets look set to join the US’s slump. Moody’s will struggle to cut costs to support the bottom line, and shaved its full-year outlook on Wednesday. The agency more than doubled its staff from the beginning of 2002 to 2007 and, while it is squeezing compensation, headcount has risen fractionally this year.

The analytics business, which provides research, valuation and risk management tools, now comprises 30 per cent of revenues, against 20 per cent last year, but will slow as financial institutions retrench. It could benefit if wary investors opt to do more number-crunching themselves. Structured finance markets, now surviving on issues destined for central banks’ funding programmes, will likely recover in a smaller, simpler and less lucrative form. The rhetoric from Washington grows increasingly hostile, with debate raging over whether issuers or investors should, in the future, pay for ratings. Meanwhile, the question is when will revenue growth return and in what form – without, that is, resorting to bovine-backed securities.

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