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Strategies & Market Trends : SiliconInvestor All Stars Forum
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To: Bid Buster who wrote (315)2/27/2007 1:16:42 PM
From: stan_hughesRead Replies (1) of 1718
 
Subprime unrest may hit ratings agencies

By: Aaron Elstein
Published: February 27, 2007 - 9:59 am

The turmoil in the subprime mortgage market is expected to take its toll on two unlikely players: Standard & Poor's and Moody's Investors Service.

The two leading credit-rating agencies have benefited greatly from the boom in lending to consumers with poor credit histories, because banks typically package these loans into bonds. Such bonds are then rated by Moody's or S&P before being sold to investors.

Analysts at Credit Suisse estimate that revenues from rating subprime mortagage-backed bonds accounted for 6% of Moody's total sales last year. They contributed about 3% of sales at S&P's parent, McGraw-Hill Cos. helping offset weakness in other areas, such as textbook publishing. More importantly, rating these kinds of bonds provides Moody's and S&P with some of their most profitable work, because profit margins are as high as 70%, Credit Suisse estimates.

But with investors growing more wary of the risks involved in buying loans backed by consumers with poor credit, chances are growing that fewer loans will be packaged into bonds this year and Moody's and S&P's earnings will shrink.

Credit Suisse downgraded its investment rating Monday for McGraw-Hill to "neutral and Moody's to underperform. " It reckons McGraw-Hill will earn $2.82 a share this year, a four-cent reduction from its previous estimate, and reckons Moody's will earn $2.57, a nickel less than its previous estimate.

newyorkbusiness.com
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