NEW YORK (
shares were higher Tuesday, along with those of
, following a bullish note on the companies from Piper Jaffray.
The firm reiterated its 'overweight' ratings on both stocks, citing positive preliminary data that indicates new debt issuance for September will show meaningful improvement on both a sequential and year-over-year basis, especially for investment grade and high-yield debt.
"Robust new debt issuance volumes provide a favorable operating backdrop for MCO and MHP, as ratings revenues are directly tied to debt issuance activity," Piper Jaffray told clients. The firm said the trend was holding true in both the U.S. and international markets, and that it believes the improvement could drive upside in third-quarter earnings at both Moody's and McGraw-Hill, which owns rival ratings agency Standard & Poor's.
To illustrate the trend in the United States, Piper Jaffray cited preliminary data saying investment grade debt issuance rose to $64.1 billion for September from a total of $48.1 billion in August, while high-yield debt issuance swelled to $14.9 billion from $9.8 billion for the same period. Year-ago domestic totals in these areas were $17.7 billion and $1.12 billion, respectively, the report said.
Moody's stock was up 12% to $21.03 in afternoon action with 15.3 million shares changing hands, well ahead of the issue's three-month daily average of 5.2 million. Share of McGraw-Hill Cos. gained 8% to $26.20 on volume of 5.5 million.
September has been a difficult month for investors in the ratings agencies as scrutiny of their role in the financial crisis has stepped up. Moody's lost more than 28% of its market cap from Sept. 16 through Monday's close on the threat of lawsuits and regulatory challenges to the oligopoly it enjoys with S&P and
. The industry will be in focus tomorrow as two separate Congressional committees hold hearings to discuss its role in the financial crisis. A former Moody's analyst is scheduled to testify at one of the hearings Wednesday. The analyst, Eric Kolchinsky, has said in various media reports that he was pressured to inflate ratings.
Also, for Moody's specifically, it hasn't helped that
, its largest shareholder, has trimmed its stake on two occasions this year, most recently at the beginning of this month.
Additionally, Ed Atorino, analyst at Benchmark Capital who downgraded both Moody's and McGraw-Hill Monday to "hold" from "buy" due to the regulatory threats, suggested short-covering might be a factor in Tuesday's rally. Hedge fund manager David Einhorn of
has said he is short both Moody's and McGraw-Hill.
Criticism of the ratings agencies is centered upon the role they played in the boom and bust in structured finance, where banks including
pooled ever-more-dubious home loans into bonds that were sold to investors. Many view the agencies as complicit in the wild popularity of these investment vehicles because they assigned triple-A ratings to many of the securities, dramatically understating their risk.
Written by Dan Freed in New York