Late last year, The Motley Fool's Rich Smith had the chance to grab some time with Raymond McDaniel, CEO of longtime
Rich Smith : I doubt there's an investor out there who hasn't heard of Moody's -- but I'd bet good money that not many of us have a good handle on what it is exactly that you do. Can you give us a thumbnail sketch of your business?
Raymond McDaniel: Moody's is among the world's most respected and widely used sources for credit ratings, research, and risk analysis. Our ratings and analysis track debt covering more than 100 sovereign nations; 11,000 company issuers; 25,000 public finance issuers; and 70,000 structured finance obligations. We have over 3,000 employees in 22 countries. Last year , our revenues were $1.7 billion.
RS: Motley Fool co-founder Tom Gardner once wrote, "Given the debt-heavy marketplace environment we've had in recent years, business at Moody's has been booming." Thanks to the Fed, companies these days are swimming in cash, buying back stock, and upping dividends. Do you see any risk of corporate self-financing rendering your services unnecessary?
RM: These conditions are more cyclical in nature. There is borrowing for merger and acquisition activity, which has been very robust this year, or borrowing for share re-purchase, as well as long-term borrowing to take out short-term financing. We are also seeing the increased use of financial technology driving demand for ratings, especially in the structured finance sector.
RS: In 2004, Moody's, S&P, and Fitch were collectively skewered by a Washington Post article alleging that these three firms are strong-arming companies -- Compuware
RM: The Washington Post series generated a lot of publicity, but contained some inaccuracies and incomplete reporting. Moody's will not change its opinion from what we believe to be an accurate and fair assessment of creditworthiness for the benefits of investors. In the end, the district court dismissed the claims against Moody's [as all such claims against Moody's have been dismissed], noting that Moody's conduct "far exceeded the requirements of a reasonable publisher or journalist" and that our predictive opinions were protected by the First Amendment.
RS: Warren Buffett argues that "widening the moat" -- taking the long-term view of how best to make the company stronger -- must take precedence. Can you give us an example of a situation in which Moody's faced pressure to do something that would have looked good in the short term, but hurt in the long term?
RM: Part of our long-term success has been our willingness to maintain our focus on long-term objectives. This singular focus dates back to our founder, John Moody. He said, "We mutually agreed that we would never go into any 'side lines' except such as naturally fit in with the activities we had and were really a part of our program." We also have a very loyal shareholder base. They are not investing in Moody's for the likelihood of Moody's surprising the markets favorably over the next few quarters. They are looking at where Moody's can go over the next five to 10 years.
RS: Hedge funds have been growing in number and influence for years -- why is it only now that Moody's has begun rating them?
RM: We've been trying to determine what type of ratings would be most useful to market participants while maintaining our own standards for accuracy, sustainability, and transparency. About a year ago, we began having in-depth conversations with hedge funds, pension funds, institutional investors, and others in the market in effort to find out how we could best help the market. We learned that an accurate assessment of operational risk was an area of great interest and value to investors.
RS: Last year, Moody's became the first Big 3 credit rater to acquire a subsidiary in China when it purchased a 49% stake in Beijing's China Cheng Xin International Credit Rating. Can you tell us why owning a stake in a Chinese subsidiary gives you an advantage over, say, S&P with its Chinese representative office?
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Rich Smith does not own shares of any company mentioned in this article. The Fool has a disclosure policy.