Buffett Sells More Moody's Stake As Credit Ratings Agencies Face Revenue Growth Challenges

The investor who once famously remarked that his best holding period for a stock is “forever” is unloading portions of his holding in a firm many believe to be a key culprit of the financial crisis.

Friday, Berkshire Hathaway (NYSE: BRK.A) announced that it sold 2.9 percent of its $874 million position in Moody’s (NYSE: MCO), raising $28.7 million. That’s the second time in the last 6 months that Berkshire has reduced its position in the credit-ratings agency: in July, the firm sold a chunky 17 percent of its stake in Moody’s, bringing its total holdings percentage-wise into the teens.

While Berkshire still remains by far Moody’s largest shareholder, it is rare for the firm to consistently reduce its holdings in any of its investments.

Given the turmoil in the financial industry over the past 18 months, Moody’s has fared relatively well. In the third quarter, Moody’s posted earnings of 43 cents a share, beating analysts’ forecasts by 5 cents a share, or 13 percent. The firm also raised its one-year earnings guidance to $1.60 to $1.68 per share vs. earlier estimates of $1.45 to $1.55 per share.

Throughout the recession, Buffett has remained more bullish than most, insisting a year ago that he was “buying American” and more recently stating that the economy has taken the brunt of its beating as a result of the subprime crisis. He made no comment on Berkshire’s latest sale of Moody’s stock.

Despite some looming hurdles in the fourth quarter, the Moody’s sale may have less to do with Buffett’s views on the financial services industry in general and more on the long-term viability of credit-ratings agencies as a business model. The agencies have experienced a marked drop-off in the demand for debt analysts as the credit markets have dried up, and have failed to bounce back along with everything else this year.

Lately, financial firms have been figuring out how to bypass the need for running new products via credit ratings agencies. Ravi Nagarajan writes at Seeking Alpha that this trend may continue:

The prospect of security issuance without traditional credit ratings again calls into question the viability of the long established moats that have provided protection for franchises such as Moody’s (MCO) and Standard and Poor’s for decades. Moody’s moat has been clearly impaired not only by high profile errors in judgment over the past two years but also due to allegations of misconduct within the firm.

While it is true that the vast majority of new issues are still rated, any trend that appears to support the idea of unrated securities could lead to momentum as the practice becomes more acceptable.

It is not just a question of credibility for rating agencies: there has always remained skepticism over their acceptance of fees for providing credit ratings. With the onslaught of numerous independent news-analysis/data research firms such as BreakingViews.com, IndexUniverse.com or even Bloomberg’s aggressive charge in this direction, the job of being an analyst at a ratings agency is going to get a lot tougher to justify on the basis of genuine need.

Despite his overarching investment philosophy, that might not be a scenario where the Sage of Omaha wants to stick around forever to see play out.