Credit Rating Agencies: short sellers grateful for a new entrant

There remains quite a large short position in credit rating specialist Moody’s at 9.5% of total shares against an index average of 2.8%. Plus, the short sellers switched tack in February. After four months of short covering, which saw the percentage of shares out on loan decrease from 15% to 8%, short interest increased in the second week of February to over 10%. However, when the price continued to rise, it fell back once again. The days to cover is quite high at 12 days.

With Moody’s share price breaking through a two-year high (cue jubilant scenes amongst the technical analysts) and brokers predicting a surprisingly successful year in store, Kroll has chosen a challenging time to enter this space. But, some short sellers are clearly skeptical that the share price will remain above USD 30.

We can also detect that long only funds that make their shares available to be borrowed ( our proxy for institutional owners) have slowed down their purchase of Moody’s shares, taking profits in mid February. After increasing their ownership from 50m shares six months ago to 65m or 27% of the company, the slowdown in purchasing from long only funds was recently punctured. This occurred when 5m shares were suddenly added to lending programs last week, potentially causing the price to spike to US $32. More and more funds seem to be keen to join Warren Buffet who is on the register with 12%. Recent fund flow movements show investor sentiment to be strongly positive in Moody’s, yet there remains an overhang of sizeable short interest.

We also had a quick look at the only Moody’s Corporate Bond for which we can see data,(MCO - 5.5% 1 Sept 2020) and found falling institutional ownership, but also falling demand to borrow.

Fitch Ratings is another of the three musketeers in the debt rating game and is owned by the French listed Finmalac. Short interest is low but a large amount of shares were recently borrowed over the record date for the 5% dividend. Unlike Moody’s, the shares have been sliding recently and this coincides with an acceleration of the pace with which funds who lend have been selling their shares. The free float is somewhat small (15%), and of that, institutional investors whose behavior we can track have gone from owning 2% of Finmalac to under 1% since September.

McGraw-Hill is a vast publishing business of which S&P is just one part. This means that those shorting the company will be motivated by more than just a view on the outlook for credit ratings. With that said, we observe that demand to borrow the company is trending upwards, but remains low at 1.4% of total shares outstanding on loan. Along with Moody’s, the six-month trend is one of short covering, but more recently the short sellers are returning.

McGraw-Hill’sshort position remains well below the sector average of 4.5% for global publishers. This rather high figure is owing to certain publishing and broadcasting firms being heavily shorted with names like Meredith (NYSE:MDP), Fairfax Media (ASX:FXJ) and the commercial search/directories business like Yellow Media (TSE:YLO)and PagesJaunes (EPA:PAJ). The only financial information platform with double digit short interest is Factset Research Systems where short selling is at a twelve month high. However, this has not hampered the march of the company’s share price, which recently hit an annual high giving an impressive P/E ratio of 38.

Kroll Bond Ratings is part backed by Bessemer Venture Partners. As early investors in Skype they clearly have a strong scent for ripe opportunities. Part of their rationale must be that there is room for another player in an activity ruled over by just three firms. Given little has altered in the way the credit rating firms source their income from the issuer, it will be interesting to see whether Kroll’s investigative heritage forces change.