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Fitch Rates Moody's Senior Unsecured Note Offering 'BBB+'; Outlook Stable
February 27, 2017 / 5:23 PM / 9 months ago

Fitch Rates Moody's Senior Unsecured Note Offering 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, February 27 (Fitch) Fitch Ratings has assigned a 'BBB+' rating to Moody's Corporation's (MCO) benchmark sized fixed rate and floating rate senior unsecured notes. The Rating Outlook is Stable. Proceeds are expected to be used for general corporate purposes including working capital, capital expenditures, acquisitions or investments, redemption and repayment of short-term and long-term outstanding indebtedness, and repurchase of common stock. Fitch currently rates Moody's Corporation 'BBB+'. Approximately $3.4 billion of debt was outstanding as of Dec. 31, 2016. A full list of ratings follows at the end of this release. 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. 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: 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 2016, approximately 39% of MIS's reported revenue was recurring. MCO's analytics segment (MA) accounts for more than 15% of its operating income, with approximately 75% of MA sales comprised of recurring revenue in 2016. Conservative Leverage: MCO continues to target solid investment-grade ratings and historically has maintained Fitch-calculated unadjusted gross leverage around 2x. As of Dec. 31, 2016, Fitch-calculated leverage was 2.0x, and Fitch expects no material change throughout fiscal 2017 barring material acquisitions. FCF margin (after dividends) and FCF-to-adjusted debt of 22.7% and 19.8, 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 $500 million in share repurchases in 2017, revised down from previous years in order to accommodate for the payment of the settlement charge taken in the fourth quarter of 2016. Dividends have consistently grown at a five-year compound annual growth rate (CAGR) of 19% through 2016. 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 to the extent that leverage remains around 2.0x. RATING SENSITIVITIES Positive: Fitch would consider an upgrade if the company's business and operational profile remains in line with current performance without any material deterioration, diversification increasing from Moody's Analytics 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; --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 $350 million of readily available cash and short-term investments as of Dec. 31, 2016, $1 billion in revolving credit facilities (all of which was available as of Dec. 31, 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. FULL LIST OF RATING ACTIONS Fitch currently rates Moody's Corporation as follows: --Long-Term Issuer Default Rating (IDR) 'BBB+'; --Short-Term IDR 'F2'; --Senior unsecured revolving credit facility 'BBB+'; --Senior unsecured notes 'BBB+'; --Commercial Paper 'F2'. The Rating Outlook is Stable. Contact: Primary Analyst Rachael Shanker, CFA Associate Director +1-212-908-0649 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Jack Kranefuss Senior Director +1-212-908-1791 Committee Chairperson Robert Hornick Senior Director +1-212-908-0523 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com; Hannah James, New York, Tel: + 1 646 582 4947, Email: hannah.james@fitchratings.com. 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) here Additional Disclosures Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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. 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