Low interest rates are turning out to be a big boon for Moody's Corp.
Moody's reported a 41 per cent jump in quarterly profit on Friday and raised its full-year earnings forecast for the second time in six weeks on a wave of new debt issues, many from corporations looking to cut their interest expense.
Companies that issue bonds pay Moody's to rate their debt, to help investors determine the likelihood of the bond defaulting. Markets at this stage are particularly receptive to companies with weak ratings, said Moody's chief executive Ray McDaniel in an interview.
"As long as we have a low-rate environment, it is a very tempting market for corporations," Mr. McDaniel said.
Revenue from corporate ratings increased 71 per cent from a year-earlier when the European debt crisis was a bigger risk to bond investors who demanded higher yields.
Rivals like Standard & Poor's and Fitch Ratings are also expected to benefit from increased corporate bond issuance.
Mr. McDaniel, in a conference call with analysts, said he believes the threat of market turmoil from the U.S. government's approaching fiscal cliff prompted some companies to issue debt sooner than they would have.
Moody's net income rose to $183.9-million (U.S.), or 81 cents per share, from $130.7-million, or 57 cents per share, a year earlier, according to the company.
Adjusted for an unusual tax benefit, the company earned 75 cents a share, beating the average analyst estimate of 63 cents, according to a survey by Thomson Reuters I/B/E/S.
Moody's stock rose 4.7 per cent to $47.87 on the New York Stock Exchange in afternoon trading.
Earnings estimates have climbed recently as analysts saw more high yield, or junk, bonds come to market. Fees that rating agencies receive from issuers of the speculative grade bonds tend to be higher than fees from investment grade companies, according to Peter Appert, a Piper Jaffray analyst.
A total of $113-billion of speculative grade debt was issued worldwide in the third quarter, up nearly four-fold from a year earlier, according to Thomson Reuters data.
The owner of Standard & Poor's, McGraw-Hill Cos. Inc, is scheduled to report its third-quarter results on Wednesday.
The ratings companies continue to pay for mistakes they made by putting top grades on securities tied to subprime mortgage loans. Costs for complying with proposed new regulations in the United States and Europe continue to rise, Moody's said.
Still, Moody's boosted its outlook for full-year 2012 profit to a range of $2.95 to $3.05 per share, up about 7 per cent from a range of $2.76 to $2.86 it forecast on Sept. 12.
The company now expects full-year revenue from bond ratings to increase in the mid-teens in percentage terms, up from the high-single-digits it forecast in September.
The new full-year outlook points to an increase of about 20 per cent over 2011 earnings of $2.49 cents a share.
Moody's shares have climbed 25 per cent from the end of June through Thursday, when they closed at $45.72.