Fitch Affirms Moody's Corporation LT IDR at 'BBB+' Following Litigation Announcement

NEW YORK--()--Fitch Ratings has affirmed the 'BBB+' Long-Term Issuer Default Rating (IDR) assigned to Moody's Corporation (MCO). The Rating Outlook is Stable. A full list of Fitch's ratings follows at the end of this release. The company had approximately $3.4 billion of debt outstanding as of Sept. 30, 2016.

The affirmation follows the announcement that the company has received a letter from the Department of Justice (DOJ) that it intends to file a civil complaint against Moody's and its Moody's Investor Service (MIS) business regarding ratings MIS assigned to residential mortgage-based securities and collateralized debt obligations leading up the 2008 financial crisis.

Fitch believes Moody's has the ability to absorb approximately $2 billion-$3 billion in potential settlements given a combination of a reduction in share repurchases and utilization of cash, including repatriating off-shore cash, and incremental debt issuance within the context of Fitch's leverage threshold at the 'BBB+' rating. This would allow the company to satisfy a material settlement and for leverage to remain within Fitch's 'BBB+' rating threshold within an acceptable time frame.

Within the rating agency sector, S&P Global Inc. settled with the DOJ, Attorneys General of 19 states and the District of Columbia, and CalPERS for approximately $1.5 billion. In addition, given the time it takes for legal and regulatory matters to be processed (cases can take years before a settlement may be reached), MCO can preserve additional liquidity if it believes a case may result in a material cash payment. As of Sept. 30, 2016, unadjusted gross leverage was 2.1 times (x) and total gross debt stood at approximately $3.4 billion ($300 million due in 2017).

Under various scenarios Fitch has modeled, which include assumptions for investments in the business (including acquisitions and capital expenditures), Fitch believes that leverage could temporarily exceed 2.5x unadjusted gross leverage and maintain current ratings providing the company significant financial flexibility at the current rating level.

Fitch makes no assumption regarding the timing, course of litigation or potential for settlement. Fitch expects Moody's to continue to deploy free cash flow (FCF) towards acquisitions and share repurchases. Continued share repurchases during a period of heightened risk of a material payment could pressure the ratings.

KEY RATING DRIVERS

High Barriers to Entry: MCO's rating segment (Moody's Investors Service; MIS) operates with limited competitive threats as a leading Credit Rating Agency (CRA) with a meaningful and defensible share of the global ratings business. The global scale, significant infrastructure required to comply with increasing regulatory standards and long history of investor acceptance serve as impediments to new entrants. Fitch notes that brand, reputation, and existing coverage are self-reinforcing and generally a prerequisite to win new businesses, creating challenges for other CRAs outside the largest three agencies competing at the regional geographic and niche product levels.

Entrenched Role of NRSROs: Nationally Recognized Statistical Rating Organizations' (NRSRO) ratings are codified within a number of federal and state regulations and statutes and are a critical element for asset managers and financial institutions to meet a variety of legal and regulatory requirements. Dodd Frank removed references to NRSROs in certain regulations in order to reduce the reliance and the required use of NRSROs' credit ratings. However, Fitch believes financial market participants will continue to rely on credit ratings given the absence of viable alternatives. Fitch also believes NRSROs will remain favored by investors compared to unregistered agencies given the more stringent oversight and compliance necessary to meet NRSRO requirements.

Diversification: Fitch notes that MCO's MIS segment is dependent on both dollar volume and number of ratable debt issues, which tend to be closely linked to the health of the major economies as well as government fiscal and monetary policies. MIS generates recurring contractual annual fees to monitor existing ratings, mitigating the more volatile fees from new issuance. As of year-end 2015, approximately 37% of MIS's reported revenue was recurring. Fitch also notes MCO's analytics segment (MA) accounts for more than 15% of MCO's operating income, with more than 70% of MA's sales comprised of recurring revenue in 2015.

Conservative Leverage: MCO continues to target solid investment-grade ratings and historically has maintained Fitch-calculated unadjusted gross leverage around 2x. As of the latest 12 months (LTM) period ended Sept. 30, 2016, Fitch-calculated leverage was 2.1x and Fitch expects no material change at the end of 2016 barring material acquisitions. FCF margin (after dividends) and FCF-to-debt of 20.3% and 20.5%, respectively, are strong for a 'BBB+' rating. There is flexibility to exceed the 2.5x target within the current rating to accommodate potential strategic M&A activity, as Fitch believes MCO can delever within 12-18 months given its FCF margin. While EBITDA margin and FCF generation could support slightly more leverage at the current rating, the regulatory and litigation event risk (discussed below) weighs upon the rating's leverage tolerance.

Share Repurchase and Dividends Growing: Management expects to complete approximately $750 million in share repurchases in 2016 which was revised from $1 billion. Dividends have consistently grown at a five-year compound annual growth rate (CAGR) of 26% through 2015. Absent large acquisition activity, Fitch expects FCF will continue to be dedicated toward shareholder returns. In addition, Fitch believes management will issue debt to support its capital allocation strategy to the extent leverage remains within the 2x-2.5x range.

Regulatory and Litigation Uncertainty: The ratings recognize several potential overhangs on MCO's credit profile, namely regulatory and litigation-related uncertainties. Fitch believes MCO carries a meaningful level of liquidity, providing financial flexibility to address regulatory and/or litigation risk. In addition, given the time it takes for legal and regulatory matters to be processed (cases can take years before a settlement may be reached), MCO can preserve additional liquidity if it believes a case may result in a material cash payment.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Moody's include:

--Low- to mid-single-digit revenue growth;

--Stable EBITDA margins;

--Base case assumes that shareholder returns continue in the form of share repurchases and dividends.

RATING SENSITIVITIES

Positive: Given the regulatory and litigation risk overhang, Fitch does not expect any positive near-term rating momentum. Fitch would consider an upgrade in the absence of material litigation or regulatory overhang, diversification increasing from MA's subscription revenue growth, and a stated commitment to a leverage target below 1.5x.

Negative: Future developments that may, individually or collectively, lead to a negative rating action:

--Acceleration of regulatory and litigation-related event risks combined with material operating or financial metric deterioration;

--Monetary penalties or settlements drove leverage over 2.5x and Fitch believed such elevated leverage levels would be maintained;

--Any debt financing transaction that drove unadjusted gross leverage over 2.5x, without the expectation of delevering below 2.5x within 12 to 18 months.

LIQUIDITY

Moody's liquidity is strong and supported by approximately $400 million of readily available cash and short-term investments as of June 30, 2016, $1 billion in revolving credit facilities (all of which was available as of June 30, 2016) and expected FCF generation. MCO's revolver, which provides liquidity backup to its $1 billion CP program, matures in May 2020. Scheduled maturities are well-laddered and manageable considering that expected FCF generation, reliable market access and backup liquidity all add to Moody's overall financial flexibility. Moody's next scheduled maturity is not until 2017 when $300 million of unsecured notes come due.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

--Long-Term IDR at 'BBB+';

--Short-Term IDR at 'F2';

--Senior unsecured revolving credit facility at 'BBB+';

--Senior unsecured notes at 'BBB+';

--Commercial paper at 'F2'.

Date of Relevant Rating Committee: Oct. 21, 2016.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)

https://www.fitchratings.com/site/re/885629

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013542

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013542

Endorsement Policy

https://www.fitchratings.com/regulatory

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.

The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.

For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.

Contacts

Fitch Ratings
Primary Analyst
Rachael Shanker
Associate Director
+1-212-908-0649
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Jack Kranefuss
Senior Director
+1-212-908-1791
or
Committee Chairperson
Robert Hornick
Senior Director
+1-212-908-0523
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Rachael Shanker
Associate Director
+1-212-908-0649
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Jack Kranefuss
Senior Director
+1-212-908-1791
or
Committee Chairperson
Robert Hornick
Senior Director
+1-212-908-0523
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: alyssa.castelli@fitchratings.com