Moody's is a provider of credit ratings, research and analysis covering debt instruments
and securities in the global capital markets and a provider of quantitative credit
assessment services, credit training services and credit process software to banks
and other financial institutions. Moody's maintains offices in 19 countries and
has expanded into developing markets through joint ventures or affiliation agreements
with local rating agencies. Moody's customers include a wide range of corporate
and governmental issuers of securities as well as institutional investors, depositors,
creditors, investment banks, commercial banks, and other financial intermediaries.
Moody's is not dependent on a single customer or a few customers, such that a
loss of any one would have a material adverse effect on its business.
Moody's operates in two reportable segments: Moody's Investors Service and
Moody's KMV.
Rating fees paid by debt issuers account for most of the revenue of Moody's
Investors Service. Therefore, a substantial portion of Moody's revenue is dependent
upon the volume and number of debt securities issued in the global capital markets.
Moody's is therefore affected by the performance of, and the prospects for,
the major world economies and by the fiscal and monetary policies pursued by
their governments. However, annual fee arrangements with frequent debt issuers,
and annual fees from commercial paper and medium-term note programs, bank and
insurance company financial strength ratings, mutual fund ratings, subscription-based
research and other areas are less dependent on, or independent of, the volume
or number of debt securities issued in the global capital markets.
Moody's operations are also subject to various risks inherent in carrying on
business internationally. Such risks include currency fluctuations and possible
nationalization, expropriation, exchange and price controls, changes in the
availability of data from public sector sources, limits on providing information
across borders and other restrictive governmental actions. Management believes
that the risks of nationalization or expropriation are reduced because the Company's
basic service is the creation and dissemination of information, rather than
the production of products that require manufacturing facilities or the use
of natural resources. Nationalization in the form of a new government-sponsored
regional or global rating agency also poses a risk to Moody's growth prospects.
However, management believes the risk is reduced because of the likelihood that
substantial investments over a sustained period would be required, compared
to other regulatory changes under consideration for the credit rating industry.
Legislative bodies and regulators in both U.S. and Europe continue to conduct
regulatory reviews of credit rating agencies, which may result in an increased
number of competitors, restrictions on certain business expansion activities
or increased costs of doing business for Moody's. At present, Moody's is unable
to assess the nature and effect any regulatory changes may have on future growth
opportunities.
Competition
The Moody's Investors Service business competes with other credit rating agencies
and with investment banks and brokerage firms that offer credit opinions and
research. Institutional investors also have in-house credit research capabilities.
Moody's largest competitor in the global credit rating business is Standard
& Poor's Ratings ('S&P'), a division of The McGraw-Hill Companies, Inc.
There are some rating markets, based on industry, geography and/or instrument
type, in which Moody's has made investments and obtained market positions superior
to S&P's. In other markets the reverse is true.
Another rating agency competitor of Moody's is Fitch, a subsidiary of Fimalac
S.A. Although Moody's and S&P are each larger than Fitch, competition is
expected to increase. One or more additional significant rating agencies also
may emerge in the United States if the Securities and Exchange Commission ('SEC')
expands the number of Nationally Recognized Statistical Rating Organizations
('NRSRO'). In February'2003, the SEC designated Dominion Bond Rating Service,
Ltd. of Canada ('DBRS') a NRSRO. Competition may also emerge from niche companies
that provide ratings for particular types of financial products or issuers,
such as A.M. Best Company in the insurance industry. Competition may also emerge
in developed markets outside the United States over the next few years, for
example, in response to the growth in the European capital markets, and in developing
markets. Any such rating agencies that may emerge may receive support from local
governments or other institutions.