NEW YORK ( TheStreet) -- Moody's Investors Service (MCO - Get Report) faces a growing threat to its business model as a little-noticed firing of the credit ratings agency by Danish banks in April could spur other issuers to follow suit, according to BTIG analyst Mark Palmer.
"The Danish banks' firing of Moody's is not likely to be an isolated incident, but could presage a trend in which frustrated issuers end their dealings with the rating agency. If the market continues to yawn in response to these firings, as we expect, this will encourage even more issuers to follow suit. The announcements of these firings would serve as catalysts for the stock's decline," Palmer wrote. He initiated Moody's with a "sell" rating and a $28 share price.
While Moody's shares opened 1.2% lower at $36.40 on Wednesday, they quickly recovered those losses and spent most of the morning in positive territory on average volumes.
Beyond predicting that Moody's will be fired by other issuers, due to "growing evidence of its diminished relevance" and "increasing competition in the ratings space," Palmer sees a "near-term headwind" from what he believes will be a slowdown in deals in the second half of 2012 and "the vulnerability of the company's non-ratings businesses to belt-tightening within its financial services industry client base."Moody's and chief rival Standard & Poor's, a unit of The McGraw-Hill Companies (MHP), have faced criticism for decades over their government-supported special status and their predictive shortcomings. While both government and private institutions have long used Moody's and S&P ratings to meet certain regulations or internal investment guidelines, Palmer argues that practice could soon change. He points to still-to-be-finalized rules stemming from the 2010 Dodd Frank law aimed at curtailing government reliance on the major credit ratings agencies. That could spur the private sector to follow suit, Palmer contends. A call to a Moody's spokesman wasn't returned. -- Written by Dan Freed in New York. Follow this writer on Twitter.