Moody's Offers Unsecured Notes - Analyst Blog

Moody's Corp. (MCO) announced that it has priced an underwritten public offering of $500 million aggregate principal amount of 5.50% senior unsecured notes due 2020. The offering is expected to close on August 19, 2010, subject to customary closing conditions.

Moody's expects to use the net proceeds from this offering for general corporate purposes, including the redemption and repayment of short-term or long-term borrowings, which may include repayment of up to $150 million of borrowings under its five-year senior, unsecured revolving credit facility and repayment of up to $196 million of its commercial paper debt.

The company will also use the proceeds for working capital, capital expenditures, acquisitions or investments requirements and repurchase of stock.

Cash flow remains strong at Moody’s and the company uses its cash flow to return value to investors in the form of dividends and share repurchases. The company has increased its annual dividend by 5% to 42 cents per share with a current dividend yield of 1.87%.

Moody’s repurchased 18.2 million shares for approximately $593.0 million in 2008. During 2009, Moody’s did not repurchase any of its shares; however, it expects buyback to resume at modest levels in 2010. During the first half of 2010, the company repurchased 3.9 million shares at a total cost of $100.0 million. At June end, the company had $1.3 billion of share repurchase authority remaining under its current program.

Moreover, the company has over $640.0 million of additional capacity available under revolving credit facility and has no major debt repayment due until 2012.

Moody’s exited the second quarter 2010 with $486.0 million in cash and cash equivalents and short-term investments. Outstanding debt reduced $274 million in 2009 and net debt position (total debt less cash) at year-end 2009 decreased $502 million or 41% from the prior year to $720 million. Moody’s reduced total outstanding debt by $99 million during the first half of 2010 to $621 million.

We believe that with a healthy cash flow and borrowing capacity, the company will continue to increase dividends and repurchase shares in the currently challenging environment.

Maintain Neutral

Moody's second quarter 2010 results beat the Zacks Consensus Estimate. The results reflect a strong corporate and financial institution debt markets, largely driven by debt issuance.

Despite better-than-expected first half 2010 results, Moody’s provided a cautious business outlook  due to the ongoing regulatory charges, weak issuance levels and inconsistent credit market conditions as a result of increased volatility and European sovereign debt crisis.

The company reaffirmed its earnings guidance for 2010 but lowered its revenue estimates. Further, we do not expect any major improvement in the Structured Finance business and the increased expenses and a slowdown in emerging markets are expected to pull back gains near term.

However, we believe Moody’s remains a solid franchise in rating debt instruments and will show a substantial growth with its diversified credit research business model and international growth. Over the long term, the company expects to deliver double-digit revenue growth and over 40% in operating margin on the back of growing Investor Service and Analytics business.

We reiterate our Neutral recommendation on the stock due to its long-term value to investors. Currently, the shares have a Zacks Rank of #3, which translates into a short-term Hold rating.

 
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