MCO - Moody's

[valuefinder0525]

I think MCO is cheap (again). This isn't deep value cheap, but I think they are currently earning well-below their "earnings power". Here's my quick summary of why MCO is better than SPGI and why it's cheap.

 

Below are some screen shots of the segment results for S&P and MCO. They both earn nearly identical revenue from their ratings segments, but MCO has 51.1% to 53.9% operating margin vs. S&P's 44%. Moody's Analytics earns just as much as S&P's CIQ and SNL, combined.

 

SPGI's market cap is almost exactly $10b greater than MCO's. That $10B basically buys you the DJIA Index royalties (~$400m/yr @ 8%-10% growth) and Platt's (I believe SPGI sold JD Power - so C&C operating profit will decline in 2016). SPGI has significantly lower margins in the apples-to-apples segments and you get to purchase the DJIA indices and Platt's at ~20x-25x (I'd have to do more work on JD Power).

 

MCO is selling at 20x 2016 earnings, which they have already guided lower on. Earnings will increase in 2016, despite reduced total issuance, HY issuance, and structured finance being well-below pre-recessionary levels. Record debt issuance is going to continue for decades and MCO is basically a small, high-margin royalty on the aggregate issuance, weighted by credit rating.

 

I think 5 years from now, Moody's EPS will be closer to $9-$10.

 

How do you get comfort around future debt issuance? What if we are at record peak levels and it's a downfall from here? What are the drivers that allow you to get conviction around future debt issuance?

 

MCO's margins are higher but the company margins seem much more volatile than S&P. Look at 2016 Q1, margins at hit with a decline in the topline. Speaking of 2016 guidance, do you still think they can hit it? It's looking less and less likely with all the Brexit volatility.

 

The problem I have had in the past with these companies is that every time they look cheap, there is less conviction around the earnings.

[cmlber]

 

How do you get comfort around future debt issuance? What if we are at record peak levels and it's a downfall from here? What are the drivers that allow you to get conviction around future debt issuance?

 

 

Hypothetically, let's say issuances and earnings were cut in half in 2017.  You'd still be getting a 2.5% yield and would from that point certainly expect volume growth in excess of GDP on a go forward basis + pricing gains of 3-4%/year so probably 10%+ organic growth.  So you'd be getting 12.5% returns on a go forward basis.  In the short term you'd probably get crushed since your cost basis would be 40x earnings instead of 20x, and the multiple would come down, but in the long run, you'd probably do very well.

[valuefinder0525]

 

How do you get comfort around future debt issuance? What if we are at record peak levels and it's a downfall from here? What are the drivers that allow you to get conviction around future debt issuance?

 

 

Hypothetically, let's say issuances and earnings were cut in half in 2017.  You'd still be getting a 2.5% yield and would from that point certainly expect volume growth in excess of GDP on a go forward basis + pricing gains of 3-4%/year so probably 10%+ organic growth.  So you'd be getting 12.5% returns on a go forward basis.  In the short term you'd probably get crushed since your cost basis would be 40x earnings instead of 20x, and the multiple would come down, but in the long run, you'd probably do very well.

 

Thanks for the color. In addition to my previous questions. I just want to get a better sense of what the incremental runway is for growth (and what the drivers are). How is the market getting bigger and how are MCO and SPGI getting a larger (or keeping) part of the market share.

[cmlber]

Hypothetically, let's say issuances and earnings were cut in half in 2017.  You'd still be getting a 2.5% yield and would from that point certainly expect volume growth in excess of GDP on a go forward basis + pricing gains of 3-4%/year so probably 10%+ organic growth.  So you'd be getting 12.5% returns on a go forward basis.  In the short term you'd probably get crushed since your cost basis would be 40x earnings instead of 20x, and the multiple would come down, but in the long run, you'd probably do very well.

 

That's a funny way to look at investment. If the price drops 1/2 (probably more) next year, you will get 12.5% return from there, so let's see, if you buy it now, you'll get back to breakeven in ~6 years. but in the long run, you'd probably do very well ;D

 

Actually, I'm saying if the earnings drop by 50% next year due to issuances cutting in half, you will probably get 12.5% return from your cost basis over time.  Or, if the price cut in half, you'd be getting 15% on the cut in half price. 

 

Obviously if you thought the earnings were going to cut in half next year you'd wait until they cut in half to buy the stock...  I'm saying in the long run you'll do well with this (if you believe in the quality of the business and pricing power) regardless of where we are in the debt cycle.

[cmlber]

Hypothetically, let's say issuances and earnings were cut in half in 2017.  You'd still be getting a 2.5% yield and would from that point certainly expect volume growth in excess of GDP on a go forward basis + pricing gains of 3-4%/year so probably 10%+ organic growth.  So you'd be getting 12.5% returns on a go forward basis.  In the short term you'd probably get crushed since your cost basis would be 40x earnings instead of 20x, and the multiple would come down, but in the long run, you'd probably do very well.

 

That's a funny way to look at investment. If the price drops 1/2 (probably more) next year, you will get 12.5% return from there, so let's see, if you buy it now, you'll get back to breakeven in ~6 years. but in the long run, you'd probably do very well ;D

 

Actually, I'm saying if the earnings drop by 50% next year due to issuances cutting in half, you will probably get 12.5% return from your cost basis over time.  Or, if the price cut in half, you'd be getting 15% on the cut in half price. 

 

Obviously if you thought the earnings were going to cut in half next year you'd wait until they cut in half to buy the stock...  I'm saying in the long run you'll do well with this (if you believe in the quality of the business and pricing power) regardless of where we are in the debt cycle.

 

To add to that, from 1973 to 1974, Berkshire Hathaway's earnings fell by 30%.  Ideally, you'd have a crystal ball and sell your Berkshire Hathaway at the end of 1973 and buy it back at the end of 1974.  The stock was down 48.7% that year.

 

But if you believed Warren Buffett could compound capital at 20%+ per year for a long time, you'd do well buying in 1973 anyways instead of worrying about whether 1974 was going to be a bad year, risking that it wasn't and you missed out on the next 40 years of compounding.

[cmlber]

Actually, I'm saying if the earnings drop by 50% next year due to issuances cutting in half, you will probably get 12.5% return from your cost basis over time.  Or, if the price cut in half, you'd be getting 15% on the cut in half price. 

 

Then I disagree with you. If earnings drop 50% next year, you will not get 12.5% return from your cost basis (today's price) for a long time.

 

 

You will get a 12.5% IRR from your cost basis (if held forever and management returns all capital to shareholders) if earnings drop 50% next year and grow organically by 10%/year thereafter.  That's a fact, it can't be disagreed with.

 

So all you're really disagreeing with is the 10%/year organic growth assumption.  Reasonable people can certainly disagree on that point.

[cmlber]

Actually, I'm saying if the earnings drop by 50% next year due to issuances cutting in half, you will probably get 12.5% return from your cost basis over time.  Or, if the price cut in half, you'd be getting 15% on the cut in half price. 

 

Then I disagree with you. If earnings drop 50% next year, you will not get 12.5% return from your cost basis (today's price) for a long time.

 

 

You will get a 12.5% IRR from your cost basis (if held forever and management returns all capital to shareholders) if earnings drop 50% next year and grow organically by 10%/year thereafter.  That's a fact, it can't be disagreed with.

 

So all you're really disagreeing with is the 10%/year organic growth assumption.  Reasonable people can certainly disagree on that point.

 

Nothing grows 10% forever. And I said as highlighted "for a long time". Not forever as you say. It's meaningless to talk about forever.

 

You're right, things can't actually grow 10% "forever."  But things can grow 10% for a long time.  Look at GEICO, look at See's Candy, look at the theme park segment of Disney, look at Coke, look at Transdigm, look at American Express.  The difference between 30 years and "forever" in investing is immaterial.  Run an IRR on paying 40x earnings for something that grows 10%/year for 30 years and then flatlines.  It's 12.3%, not 12.5%.  Irrelevant. 

 

I know two smart people who got quite rich talking about forever, so I'll continue to do so.

 

"Our favorite holding period is forever."

-Warren Buffett

[Guest Schwab711]

Hypothetically, let's say issuances and earnings were cut in half in 2017.  You'd still be getting a 2.5% yield and would from that point certainly expect volume growth in excess of GDP on a go forward basis + pricing gains of 3-4%/year so probably 10%+ organic growth.  So you'd be getting 12.5% returns on a go forward basis.  In the short term you'd probably get crushed since your cost basis would be 40x earnings instead of 20x, and the multiple would come down, but in the long run, you'd probably do very well.

 

That's a funny way to look at investment. If the price drops 1/2 (probably more) next year, you will get 12.5% return from there, so let's see, if you buy it now, you'll get back to breakeven in ~6 years. but in the long run, you'd probably do very well ;D

 

I know folks are extrapolating a hypothetical, but realistically if earnings declined by 50% they would probably rise by much more than 10% the year after. Past recessions and common sense says debt issuance can only be delayed for so long. Especially with a high probability of government intervention. I think there's something to be said for the fact that even if earnings hypothetically declined 50%, no one believes that would be permanent. Finally, in the future, MCO will sell at a multiple of those future earnings. Returns are more likely to be dictated by whatever multiple of future earnings power MCO sells for (if I continue to hold). The amount of cash generated over the next couple years are likely to be immaterial to my total returns over a longer holding period. That is really the magic of high-quality companies with secular tailwinds, I just need earnings to be greater in the future than today and total returns are likely to be nearly proportional to the increase in earnings (since MCO already sells at a high multiple).

 

If I am wrong about higher future earnings, it will absolutely hurt. I think the probability MCO has higher earnings in the future is extremely high, though.

 

To get away from the theoretical, I think MCO is cheap because they are facing just about every headwind possible at the moment. They cut guidance a month after issuing it, HY issuance is down and expected to decline further because of energy and commodities prices at multi-year lows, and structured finance product issuance is well-below pre-recession highs. I think both I think HY and SFP issuance will be significantly greater 5-7 years compared to today. Simple as that. Further, I think these predictions have a fairly high probability of occurrence.

 

I actually think MCO is more likely to be hurt by further appreciating USD as opposed to declining debt issuance.

[marazul]

I agree that this might be on the attractive side. 5% fcf yield and they need basically 0 capex to grow. To get to a 12% IRR you need 7% FCF growth (leaving taxes and multiples aside). Say we get 3% pricing per year, we would just need ~4% business growth. This seems possible given tailwinds in analytics (volume & margin), movement from banks to credit markets, GDP growth, pickup in structured products, etc... Think way investors can get impaired/hurt here is if regulators go after the business model. If investors could be assured that current economics won´t be changed by regulators (I know fantasyland), this seems like a "no braina"

[cmlber]

I agree that this might be on the attractive side. 5% fcf yield and they need basically 0 capex to grow. To get to a 12% IRR you need 7% FCF growth (leaving taxes and multiples aside). Say we get 3% pricing per year, we would just need ~4% business growth. This seems possible given tailwinds in analytics (volume & margin), movement from banks to credit markets, GDP growth, pickup in structured products, etc... Think way investors can get impaired/hurt here is if regulators go after the business model. If investors could be assured that current economics won´t be changed by regulators (I know fantasyland), this seems like a "no braina"

 

If having hundreds of billions of dollars of AAA rated debt downgraded to junk, which played a role in creating the financial crisis, didn't cause regulators to disrupt the business model, what will?  It's always possible, but seems like the aftermath of the financial crisis is a good test of the resiliency of the business model.

 

They are guiding to 3-4%/year real pricing increases.  That's 5-6% if you think inflation will be 2%, and that means growth in earnings in excess of that since it all drops to the bottom line.

[ScottHall]

Moody's and S&P seem like leeches on society. I love it.

[Guest Schwab711]

Great bidness.  So you're looking at a 20x run-rate FCF?  Man, I keep reading about Buffett's heartburn paying 8x EBIT (or was it 6) for See's.

 

An acquisition multiple from 40+ years ago doesn't seem to relevant to today. To extrapolate, everyone on the board should be 100% cash since there is nothing out there like See's at 6x or 8x EBIT. WEB purchased PCP at a higher P/E and EV/EBIT ratio than MCO is currently selling for.

[CorpRaider]

That was not an intended inference from the observation. 

[cmlber]

Great bidness.  So you're looking at a 20x run-rate FCF?  Man, I keep reading about Buffett's heartburn paying 8x EBIT (or was it 6) for See's.

 

An acquisition multiple from 40+ years ago doesn't seem to relevant to today. To extrapolate, everyone on the board should be 100% cash since there is nothing out there like See's at 6x or 8x EBIT. WEB purchased PCP at a higher P/E and EV/EBIT ratio than MCO is currently selling for.

 

Also, corporate tax rates were much higher then, I think close to 50%. So you should really compare P/Es.  And the 10 year treasury was 6% at that time.  So his earnings yield on See's (assuming 8x EBIT which I didn't bother to fact check) would be 6.25%, 0.25% better than treasurys.  Moody's at 20x is a 5% earnings yield vs 10 year treasurys of 1.6%.  So Moody's is arguably "cheaper" given the lack of alternatives today.

[CorpRaider]

Interesting viewpoint, thanks for sharing.  The effective U.S. corporate tax rate in 1972 was about 38%, I believe.  It is currently ~27%.  So you're right, that's a material change and the interest rates definitely have elevated valuations generally.  I suppose I was just bemoaning the lack of the target rich environment of our grandfathers.  Also, I think that I personally need to be more selective like WEB and Munger.  The personal bent of the comment is why I removed it, but it was somehow revived by the quotation in the response above.

 

It looks like Chuck Akre has been buying some lately.  So you guys are in good company.

 

I do think this highlights for me perhaps why some of the great investors seem to have a preference for looking at EBIT or some metric closer to the operating income to compare and analyze opportunities across companies and time periods as many of the items which impact those figures on their way to becoming net earnings are either highly malleable or uncontrollable and likely to be transitory (i.e., based on capital structure, tax domicile, inflation and interest rate environment, etc...)

[cmlber]

Interesting viewpoint, thanks for sharing.  The effective U.S. corporate tax rate in 1972 was about 38%, I believe.  It is currently ~27%.  So you're right, that's a material change and the interest rates definitely have elevated valuations generally.  I suppose I was just bemoaning the lack of the target rich environment of our grandfathers.  Also, I think that I personally need to be more selective like WEB and Munger.  The personal bent of the comment is why I removed it, but it was somehow revived by the quotation in the response above.

 

It looks like Chuck Akre has been buying some lately.  So you guys are in good company.

 

I do think this highlights for me perhaps why some of the great investors seem to have a preference for looking at EBIT or some metric closer to the operating income to compare and analyze opportunities across companies and time periods as many of the items which impact those figures on their way to becoming net earnings are either highly malleable or uncontrollable and likely to be transitory (i.e., based on capital structure, tax domicile, inflation and interest rate environment, etc...)

 

You also need to keep in mind that in 1972, dividends were taxed at the individual rate which for the top bracket was 70%.  Corporate earnings are worth substantially less to investors when the only way to ever actually get them in your pocket is to pay 70% to the government first.  Also, the capital gains rate was 36.5% vs 23.8% for the top bracket today.  Those both make after-tax corporate earnings worth substantially less.  So what was clearly a target rich environment in hindsight maybe looked the same then as opportunities look today, except that generation got the benefit of significantly reduced tax rates in future years. 

 

So your real, after-tax expected returns as an investor maybe aren't very different today.

 

 

[CorpRaider]

Interesting.  Yeah, I don't know how much Buffett would have considered a one time dividend tax that he was probably planning to defer indefinitely but I'm sure it had some impact on valuations generally.  It seems like stuff like that happens over and over and leads to low valuations/CAPEs.  Also, not sure how the DRD worked back then.  The effective rates should take into account all of the marginal rates as well as the available deductions and credits, etc...and would likely be a better cross-temporal point of reference (although there is some debate about the actual effective rates).  It is probably a good general point you make, however, of anchoring bias based on the relative values of the time.  I feel like there will be some mean reversion on tax rates, corporate profit margins, labor and other inflation, and interest rates so I'm trying to be selective, generally speaking.

[Guest Schwab711]

The problem with this company is that it doesn't have an economic moat over its competitors. There is no secret sauce and this space may be ripe for disruption. It's business model is primarily driven by debt issuance which will probably shrink, so even if it looked cheap, you're getting in front of some major downwards revenue adjustments which seems like a dangerous place.

 

This is an interesting point and I'm glad there's some push-back on the quality of MCO's business. It would be great to hear other ideas on why CRAs are not as great of a business as I think or where future competition could come from. Your post got me thinking that CRAs could potentially be threatened by investors using the swaps market as a proxy for risk instead of requesting an issuer get a rating from a CRA.

 

I agree that on the surface, rating agencies should be easy targets for competition (high returns/margins and data analysis is generally experiencing rapid deflation). However, like FICO, I think the non-regulatory barriers to entry are significantly higher than they might appear.

 

First, it is expensive and complicated to accurately rate large, diverse swaths of companies, especially across countries. NRSROs take on a certain amount of liability with each rating that is substantially greater than the fee they receive for the rating. This makes it difficult for upstarts to provide a unique process due to the fear of being wrong. Rating agencies are judged on the breadth of services they are able to provide (can they rate complicated entities like insurance companies, banks, governments, structured products, ect) and the accuracy of their ratings.

 

MCO and S&P in particular are often built into the analysis software at major banks, insurance companies, and institutional investment firms. Their ratings are deeply integrated into nearly all of their proprietary models and other decision making tools. These types of companies have used S&P/Moody's ratings for so long that they have a huge amount of historical data available to compare their loan/bond investments against CRA ratings to improve their decision making going forward. The intricacies of S&P and Moody's ratings are well-understood as opposed to their peers. For competition to take market share, they would have to be substantially more accurate and be able to rigorously prove it such that the improvement gap outweighs all the costs related to updating databases, software, training, and so on. S&P and Moody's are so entrenched and the costs of switching are probably in the 10's of billions of dollars that I don't see how any competitor could take share.

[cmlber]

The problem with this company is that it doesn't have an economic moat over its competitors. There is no secret sauce and this space may be ripe for disruption. It's business model is primarily driven by debt issuance which will probably shrink, so even if it looked cheap, you're getting in front of some major downwards revenue adjustments which seems like a dangerous place.

 

Your post got me thinking that CRAs could potentially be threatened by investors using the swaps market as a proxy for risk instead of requesting an issuer get a rating from a CRA.

 

 

There's no incentive for that to happen though.  Investors don't pay to look at ratings, so there is no reason they would suddenly begin looking at the swaps market as a proxy for risk instead of ratings when Moody's and S&P ratings are available, free of charge.  The companies pay for the ratings.  So it's very unlikely that disruption happens at the investor level.  It would need to be at the company level with CFOs deciding it isn't worth having rated debt. 

 

Moody's margins are 50% with huge scale, so if a competitor came in and cut the price in half, it would almost certainly be losing money.  And is the CFO of a multi-billion dollar company really going to drop a Moody's rating to save 3bps of an issuance if a new entrant was willing to lose money?  Think about that.  If you issue $10 billion a year in debt, and a competitor offered to lose money on your business and cut Moody's price in half, you'd save $3 million a year on ratings for what must be a $100 billion+ company to be issuing that amount of debt.  Does that CFO really care?  If they save 3bps, nobody will notice.  If they issue unrated debt and the yield is 30bps above rated comps, they'll look like the dumbest CFO on the planet.

 

I can't imagine the value of a rating ever being less than the cost (without dramatic price increases).  Would you buy unrated debt if your personal assessment of its quality was equivalent to rated debt that had a yield 3bps lower?  I wouldn't, I'd just buy the rated debt and sleep better.  I got interested in this business recently when someone tried to show me an ultra-short duration Guggenheim fund that was yielding 75bps more than the Vangaurd ultra-short duration fund I have my cash in.  30% of the debt was unrated or not rated by the big 3 (which partially is why the yield was so much higher) and there was absolutely no chance I was risking picking up pennies in front of a steamroller with my cash.  Hundreds of thousands of individual decisions like that drive the yield on unrated debt higher, increasing funding costs for those companies.

 

As an individual investor evaluating different bond funds, I can look back over the last 20-30 years and see the historical default rates of Moody's/S&P AAA/AA/A rated debt.  A new entrant has no history for me to evaluate what a rating really means. 

 

For the CRA business model to change, I think you would need pension funds and index funds (and ultimately their investors) en masse to decide that they could do better in the long run buying unrated debt because it offers 20-30bps higher yields than comparable quality rated debt.  But then they need to build out duplicative credit research teams to assess credit quality instead of just putting in their mandates "The investment manager will only buy investment grade debt as determined by Moody's or S&P."  It makes a lot more sense for the thousands of pensions, index funds, mutual funds, sovereign wealth funds, etc. to just outsource the credit analysis to two firms (Moody's/S&P).  That is clearly the superior economic outcome.  And as long as that remains the case, I don't see the business changing.

 

I guess it's possible that over time investors could instead outsource their credit analysis to the CDS market and get higher yields by buying unrated debt with quality comparable to investment grade as evidenced by the CDS market.  But why hasn't that happened yet?  And are the CDS markets liquid enough to do that?  I would imagine the CDS spreads for the vast majority of issues that aren't controversial/liquid are themselves based mainly on credit ratings. And even if this happened, it wouldn't make ratings useless in the eyes of a CFO, it would just drive down the value (i.e. spread between similar quality rated and unrated debt) as the pool of additional demand for rated debt decreased and the pool of demand for unrated debt increased.  And there is a lot of room for the value to be driven down before it gets anywhere near price.

[JBTC]

Over the past 30 years, the business has benefitted from 2 big tail winds, 1) a massive decline of interest rate from the high teens in the late 70's / early 80's to close to zero today, which encourages all forms of debt financed activities, consumer and corporate, and 2) the disintermediation of regulated financial institutions (banks / insurance companies) by the ever more liquid capital market.  Both of these tail winds have arguably run their courses, and show signs of reversal.

 

Interest rate - one can argue rate will continue to stay low for the foreseeable future, but it likely won't go much lower.  Yes rates are negative in many places in the world, but it's not clear that negative rate encourages capital formation and a further expansion of debt.  If anything, it's quite possible the opposite is true.  Credit metrics that look reasonable at today's borrowing cost would look very stretched at significantly higher interest rate.  The society therefore can't and won't support as high a debt load as the one existing today.  This is sort of a longer term headwind even if one believes in the lower for longer thesis on rates.

 

Just to circle back to the question raised by HJ of future debt issuance volume, does anyone have a proper rebuttal? Seems most people are content with the assumption that volume will be GDP plus like it has been.

 

I am new to the name. Any thoughts appreciated.

 

[cmlber]

Over the past 30 years, the business has benefitted from 2 big tail winds, 1) a massive decline of interest rate from the high teens in the late 70's / early 80's to close to zero today, which encourages all forms of debt financed activities, consumer and corporate, and 2) the disintermediation of regulated financial institutions (banks / insurance companies) by the ever more liquid capital market.  Both of these tail winds have arguably run their courses, and show signs of reversal.

 

Interest rate - one can argue rate will continue to stay low for the foreseeable future, but it likely won't go much lower.  Yes rates are negative in many places in the world, but it's not clear that negative rate encourages capital formation and a further expansion of debt.  If anything, it's quite possible the opposite is true.  Credit metrics that look reasonable at today's borrowing cost would look very stretched at significantly higher interest rate.  The society therefore can't and won't support as high a debt load as the one existing today.  This is sort of a longer term headwind even if one believes in the lower for longer thesis on rates.

 

Just to circle back to the question raised by HJ of future debt issuance volume, does anyone have a proper rebuttal? Seems most people are content with the assumption that volume will be GDP plus like it has been.

 

I am new to the name. Any thoughts appreciated.

 

http://www.mckinsey.com/global-themes/employment-and-growth/debt-and-not-much-deleveraging

 

From 2000 to 2014, total global debt as a % gdp went up from 246% to 286%.  Hardly looks like a huge bubble but definitely elevated.

 

But what really matters for Moody's is non-financial corporate debt, and if you look at debt/ebitda ratios, we are actually well below historical averages going back to the 90s because corporate profits as a % of GDP is at a high.

 

http://www.bloomberg.com/gadfly/articles/2016-02-08/about-that-29-trillion-in-corporate-debt

 

Also, last few quarters 80% of new non-financial corporate debt in Europe has been through bonds compared to existing stocks of only 20% outstanding debt in Europe in bonds vs bank loans.  As those older bank loans mature and get disproportionately refinanced through the bond market, that's a big tailwind to offset any decline due to being peakish in global debt as a % of GDP.

 

It's not debt issuance that matters, it's bond issuance that matters for Moody's, and bonds are stealing share from banks every year.

 

 

 

 

[Guest Schwab711]

cmlber: Excellent rebuttal to the proposed swaps threat. I wonder if MCO/S&P or FICO has a stronger grip on the neck of their customers.

 

To follow up on cmlber's debt issuance response. Moody's (and S&P ratings) have substantially higher margins on structured products and high-yield debt than anything else. I think that's why the conversation steered in that direction. The majority of global debt is issued by governments (sovereign or local), which is a low margin LOB.

 

I think cmlber is correct to point out that Europe's transition to bonds from bank debt is a huge tailwind. Moody's has 35% market share in Europe and it's growing slightly. The new EU propostion to increase competition has actually created the opposite effect. The only difference between the US and EU CRA industry is there are 4 competitors in the EU vs 2 in the US.

 

I think the EU will ultimately have ~70%-80% of debt issued as bonds and the CRA market share will resemble the global market share: MCO/S&P with 40% each, Fitch with 15%, DRBS/A.M. Best with 4% (for specialty reasons), and everyone else with <1%

 

Cool reports on CRAs in the EU:

2014:

https://www.esma.europa.eu/sites/default/files/library/2015-1879_esma_cra_market_share_calculation.pdf

 

2013:

https://www.esma.europa.eu/sites/default/files/library/2015/11/2014-1583_credit_rating_agencies_market_share_calculation_2014.pdf

[JBTC]

I think cmlber is correct to point out that Europe's transition to bonds from bank debt is a huge tailwind.

 

Thanks. Is there a way to work out the impact of this mix shift in terms of annual volume growth for MCO?

 

[Liberty]

Schwab and others, any thoughts on MCO vs SPGI?

[JBTC]

 

As those older bank loans mature and get disproportionately refinanced through the bond market, that's a big tailwind to offset any decline due to being peakish in global debt as a % of GDP.

 

I understand the bond vs. bank debt argument. I am nonetheless curious if there is a reasonable case in which the global debt issuance may fall as a % of GDP in the coming decades, and if such a fall could stop MCO's volume from growing?

 

To be able to make the statement you made, we need to quantify (roughly) both factors.