Moody's (MCO)

Moody’s and S&P Global have this year traded as a blended average of two different businesses: a deeply moated ratings franchise that is largely insulated from AI disruption, and a data and analytics operation that is squarely in its crosshairs. In the current AI panic, each stock has sold off roughly in proportion to its exposure to the latter.

I don’t think anyone is confused about what makes credit ratings a GOAT business. But just in case, here’s what I wrote about it back in 2017:

_…ratings underpin the risk weightings that banks attach to assets to determine capital requirements, dictate which securities a money market fund can own, and, in ostensibly surfacing the credit risk embedded in fixed income securities, make it easier for two parties to confidently price and trade, enhancing market liquidity._

_Because of such industry-wide adoption, a debt issuer has little choice but to pay Moody’s for a rating if it hopes to get a fair deal in the market: an issuer of $500mn in 10-year bonds might pay the company 6bps ($300k) upfront, but will save 30bps in interest expense every year ($15mn over the life of the bond)….and each incremental issuer who pays the toll only further reinforces the Moody’s ratings as the standard upon which to coalesce, fostering still further participation. This feedback loop naturally evolves into a deeply entrenched oligopoly._

Moody’s and S&P enjoy what I described back then as a “standards moat”. The durability of their credit ratings have less to do with the relative accuracy of default and loss assessments than by the role they play as a ubiquitously adopted benchmark across the financial ecosystem. A startup could conceivably use AI-powered algorithms to create a ratings methodology that was just as accurate and Moody’s and S&P’s would still remain entrenched.

The credit ratings business should be buoyed by several durable growth themes over the foreseeable future. Some $5tn of debt needs to be refinanced over the next four years, roughly double the dollar volume seen in 2018. The swelling stock of private credit will increasingly demand risk scores too, as regulators and investors press for comparability with public debt markets; Moody’s private credit ratings revenue grew 60% last year. Infrastructure funding, including AI data centers, supplies a further tailwind. Ratings revenue is lumpy and unpredictable year to year, but over extended periods has reliably tracked the high-single digit growth rate that management has long guided to. I don’t expect the future to look much different from the past.