Moody’s Corporation (MCO) is the parent company of the Moody’s Investors Service bond credit rating agency. Like Standard & Poor’s, now owned by McGraw-Hill (MHP), Moody’s controls about two-fifths of the global market.
Moody’s is a publicly-traded company which has always been headquartered in New York City. As of 2010, the current CEO and chairman of the board is Raymond McDaniel, who has been an executive at the firm since 2001. The largest minority shareholder is currently Warren Buffett’s investing company, Berkshire Hathaway.
– Business Activities –
The purpose of Moody’s, and similar companies, is to rate bond issuers such as corporations and governments. These ratings function in a manner analogous to personal credit ratings: they provide a snapshot of how reliable and responsible the institution’s behaviour has been in regards to making payments on debt, in order to guide bond purchasers in estimating how likely the debt will be repaid in full and on schedule in the future, as well.
Moody’s rating service provides separate ratings for long-term credit, short-term credit, short-term municipal bonds, and individual bank financial strength ratings. The best-known and most commonly cited are its long-term ratings, which follow a complicated letter scale. Investment-grade credit (i.e. good credit) ranges from Aaa (the highest), through Aa1-3, A1-3, and then Baa1-Baa3. The lowest investment-grade rating, Baa3, is associated with moderate risk: potentially unreliable, but not exceptionally dubious.
The lower range of Moody’s ratings is speculative, commonly referred to as “junk bond” status. Junk bonds range from Ba1, which are questionable, to C grade, at which point Moody’s assessment is that there is a poor chance of ever recovering the principal being invested. C-grade investment opportunities involve companies which have defaulted on existing debts, or seem poised to do so.
– Corporate History –
Moody’s is a century old, having first been created in 1909 by American financial analyst John Moody (1868-1958) as a railroad securities analysis project. Moody expanded his project to include bonds issued by cities (i.e. municipal bonds), and then quickly from there to include virtually the entire American bonds market by the 1920s.
Since the 1970s, the company has led the bonds market in a number of important changes. Moody went from covering firms in just a small handful of countries in that decade, to covering over a hundred countries today. It also changed from an investors’ service, charging fees to subscribers interested in purchasing bonds, to deriving substantial income from charging corporate bond issuers in exchange for rating their viability. In the wake of the 2007-2008 subprime mortgage crisis, some critics of the bond rating industry as a whole (and not necessarily Moody’s in particular) have argued that this practice creates an inherent conflict of interest by giving rating agencies an incentive to rate corporations more favourably than they strictly ought to.