Moody's Corp. led the S&P 500 down as a percentage decliner Thursday, with one analysts saying that ongoing problems in global credit markets could curtail business.
THE SPARK: Lazard Capital Markets analyst William Bird downgraded the ratings agency's stock to "Neutral" from "Buy," saying that the pipeline of future debt offerings that Moody's would be hired to rate could be choked off.
Lingering problems in the European debt market, and a heated debate in the United States about capping federal borrowing, could hurt the market for new debt, Bird said. Riots in Greece this week have stoked uncertainty in the financial markets, with investors increasingly worried about government debt defaults. The yield on Greek 10-year bonds shot above 18 percent, underlining investors' doubts that they will be repaid in full.
THE BIG PICTURE: The financial health of Moody's is dependent on the health of the global debt market. The company charges fees to rate new and outstanding debt, giving creditors an idea of how safe an investment any given debt offering might be.
Things look good for Moody's over the long term, Bird said. In spite of the current uncertainty, it's not like the debt market is going to disappear. Governments and companies will always need to borrow money.
"Moody's is in effect a toll collector in a market with very attractive long-term growth dynamics," Bird wrote to clients.
But the outlook isn't nearly as rosy as it has been in the past. With so much uncertainty over the credit markets in Europe and the United States, it's hardly a bull market for borrowing. That means Moody's won't likely jump in value any time soon.
"The stock is up 51 percent (year-to-date) and we believe risk/reward has moved back into balance," Bird wrote. "We believe the market is fairly pricing the durability of (Moody's) competitive position and its still-attractive growth profile."
SHARE ACTION: Shares of Moody's fell nearly 5 percent, or $1.94, to $38.27 in midday trading. The price stock has vacillated widely over the last year, trading between $19.46 and $41.93 per share.