What we think about Moody's (MCO)
Moody’s in Three Words: Bonds, Ratings, Brand
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Background
In 1975, the SEC approved three nationally recognized statistical rating organizations (NRSRO): Moody’s, S&P Global Intelligence (NYSE: SPGI), and Fitch Group. NRSROs are organizations that give “credit ratings that reflect a rating agency’s opinion, as of a specific date, of the creditworthiness of a particular company, security, or obligation.”
Until 2003, no other rating agency was approved by the SEC, giving these three organizations, the Big Three as they are commonly called, incredible mindshare and storied reputations. Today, while there are nine SEC-approved NRSROs, the Big Three collectively assign more than 95% of outstanding credit ratings in the US. The Big Three oligopoly commands over 90% of the market share in Europe.
Moody’s place in the Big Three gives it both regulatory and branding advantages, providing Moody’s economic moat with two distinct dimensions. Regulatory hurdles make it hard for disruptive upstarts to break into the business in most developed economies. Moody’s name and reputation make it difficult for lesser competitors, even those recognized by regulatory authorities, to take market share away from it.
These competitive advantages give Moody’s rating agency incredible pricing power. Organizations wishing to go with a credit rating agency outside the Big Three might save a little on fees but must pay a higher interest rate to woo investors who are wary of buying bonds rated by lesser-known agencies.
The downside to this incredible economic moat is that bond issuance is closely tied to the broader economy, making revenue lumpy and cyclical. While the market can be choppy and cyclical, bond issuance and global GDP should continue to rise over a long time horizon. Moody’s is a great long-term investment to participate in the growth of the business world.
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