Moody's

Moody's Corporation (NYSE: MCO) is the holding company for Moody's Analytics and Moody's Investors Service, a credit rating agency which performs international financial research and analysis on commercial and government entities. The company also ranks the credit-worthiness of borrowers using a standardized ratings scale. It is one of the Big Three credit rating agencies and has a 40% share of the world market, as does its main rival, Standard & Poor's; Fitch Ratings has a smaller share.

Moody's was founded in 1909 by John Moody. Top institutional owners of Moody's include Berkshire Hathaway and Davis Selected Advisers.

History

Moody's was founded in 1909 by John Moody, beginning with Analyses of Railroad Investments, "a book about railroad securities, using letter grades to assess their risk. Moody's Investors Service was incorporated on July 1, 1914, and soon extended coverage to US municipal bonds. By 1924, Moody's ratings covered nearly 100 percent of the US bond market.

In the 1970s, Moody's expanded into commercial debt, and also began the practice, along with other ratings agencies, of charging bond issuers for ratings as well as charging investors.

The number of countries covered by Moody's has risen from 3 in 1975, to 33 in 1990, to over 100 by 2000. Announcements by Moody's of possible or actual downgrades of a country's bond rating can have a major political and economic impact, as for example in Canada in 1995.

Criticism

Credit rating agencies such as Moody's have been subject to criticism in the wake of large losses in the asset-backed security collateralized debt obligation (ABS CDO) market that occurred despite being assigned top ratings by the credit rating agencies. For instance, losses on $340.7 million worth of ABS collateralized debt obligations (CDO) issued by Credit Suisse Group added up to about $125 million, despite being rated AAA by Moody's.

Similarly, large companies such as AIG, Lehman Brothers had AAA and AA rating until they went bankrupt in 2009.

Power and influence

Moody's has been accused of "blackmail". In one example the German insurer Hannover Re was offered a "free rating" by Moody's. The insurer refused. Moody's continued with the "free ratings", but over time lowered its rating of the company. Still refusing Moody's services, Moody's lowered Hannover's debt to junk, and the company in a few hours lost $175 million in market value.

"As the housing market collapsed in late 2007, Moody's Investors Service, whose investment ratings were widely trusted, responded by purging analysts and executives who warned of trouble and promoting those who helped Wall Street plunge the country into its worst financial crisis since the Great Depression. A McClatchy investigation has found that Moody's punished executives who questioned why the company was risking its reputation by putting its profits ahead of providing trustworthy ratings for investment offerings.

Portugal controversy

Portugal's foreign debt downgrade to the category Ba2 "junk" has infuriated the European Union and Portugal alike. Moody's has been accused of fuelling speculation and bias towards European assets. Furthermore the legitimacy of US based rating agencies has also been put in question. State owned utility and infrastructure companies like ANA – Aeroportos de Portugal, Energias de Portugal, Redes Energéticas Nacionais, and Brisa – Auto-estradas de Portugal were also dowgraded despite having solid financial profiles and significant foreign revenue.

Portuguese citizens promptly classified Moody's actions as economic terrorism and spawn several initiatives on social sites, namely Facebook, to express their outrage. Mainly the initiatives were aimed at disrupting Moody's website. On the 11th of July, the website was temporarily unavailable in Portugal and a few other countries, due to a coordinated DDoS attack. Portuguese IP's were temporarily blocked from the web server in order to minimize the disturbance.

Moody's ratings

Includes the differences with Standard and Poor's ratings.

Long-term obligation ratings

Investment grade

Aaa: Moody judges obligations rated Aaa to be the highest quality, with the "smallest degree of risk".

Aa (Aa1, Aa2, Aa3): Moody judges obligations rated Aa to be high quality, with "very low credit risk", but "their susceptibility to long-term risks appears somewhat greater". (AA+, AA and AA- in S&P)

A (A1, A2, A3): Moody judges obligations rated A as "upper-medium grade", subject to "low credit risk", but that have elements "present that suggest a susceptibility to impairment over the long term". (A+, A and A- in S&P)

Baa1, Baa2, Baa3: Moody judges obligations rated Baa to be "moderate credit risk". They are considered medium-grade and as such "protective elements may be lacking or may be characteristically unreliable".

Speculative grade (also known as "High Yield" or "Junk")

Ba1, Ba2, Ba3: Moody judges obligations rated Ba to have "questionable credit quality.

B1, B2, B3: Moody judges obligations rated B as speculative and "subject to high credit risk", and have "generally poor credit quality.

Caa1, Caa2, Caa3: Moody judges obligations rated Caa as of "poor standing and are subject to very high credit risk", and have "extremely poor credit quality. Such banks may be in default.

Ca: Moody judges obligations rated Ca as "highly speculative and are "usually in default on their deposit obligations".

C: Moody judges obligations rated C as "the lowest rated class of bonds and are typically in default, and "potential recovery values are low".

Special

WR: Withdrawn Rating

NR: Not Rated

P: Provisional

Short-term taxable ratings

P-1 Moody judges Prime-1 rated issuers as having "a superior ability to repay short-term debt obligations".

P-2: Moody judges Prime-2 issuers as having "a strong ability to repay short-term debt obligations".

P-3: Moody judges Prime-3 rated issuers as having "an acceptable ability to repay short-term obligations".

NP: Moody considers "Not Prime" rated issuers as not falling "within any of the Prime rating categories".

Moody notes that "Canadian issuers rated P-1 or P-2 have their short-term ratings enhanced by the senior-most long-term rating of the issuer, its guarantor or support-provider.

Short-term tax-exempt ratings

Unlike S&P, Moody's has separate categories for short term municipal bonds. The ratings categories largely overlap, though, and have the same implications for the ability to repay short-term obligations.

Individual bank ratings

Moody's also rates each bank's financial strength. These ratings differ from deposit ratings in that they measure how likely the bank is to need assistance from third parties.

A: "superior intrinsic financial strength

B: "strong intrinsic financial strength

C: "adequate intrinsic financial strength

D: :"modest intrinsic financial strength, potentially requiring some outside support at times"

E: "very modest intrinsic financial strength, with a higher likelihood of periodic outside support"

Executive officers

Raymond W. McDaniel Jr. - Chairman and Chief Executive Officer

Linda S. Huber - Executive Vice President and Chief Financial Officer