UPDATE 4-Moody's cuts 2008 view; credit freeze hits profit

* CEO says freeze easing slightly, Q4 may be trough

* Structured finance revenue falls by half

* Shares rise as quarterly results top forecasts (Adds CEO comments, updates stock price)

By Jonathan Stempel

NEW YORK, Oct 29 (Reuters) - Moody's Corp (MCO.N), the parent of credit rating agency Moody's Investors Service, cut its 2008 forecast and reported a 17 percent drop in third-quarter profit as demand plummeted for new bond ratings.

But the results topped analysts' forecasts, and Moody's shares rose in early-afternoon trading on Wednesday, after having fallen by about half since early September.

Ratings activity "has seized up, and business may be falling off a cliff in October," Edward Atorino, an analyst at Benchmark Co in New York, said after the results were released. "But the commercial paper market has picked up, and there may be deals in the pipeline, including internationally. Maybe the market is thinking the fourth quarter is the bottom."

Atorino has a "buy" rating on Moody's, whose largest investor is billionaire Warren Buffett's Berkshire Hathaway Inc (BRKa.N) (BRKb.N).

Moody's quarterly profit fell to $113 million, or 46 cents per share, from $136.9 million, or 51 cents, a year earlier.

Excluding items, profit was 45 cents per share, topping the average analyst forecast of 41 cents, Reuters Estimates said.

Revenue also fell 17 percent to $433.4 million, above the average $423 million forecast. Expenses dropped 11 percent.

"Disruptions and uncertainty in the financial markets worsened materially in September," dampening issuance in that month and also through October, Chief Executive Raymond McDaniel said on a conference call.

But he said the fourth quarter could be a trough for issuance, especially if investor appetite for risk increases and credit spreads tighten. "A lot is going wrong, but not everything is going wrong," he said.

FORECASTS CUT

Quarterly revenue fell 50 percent from collateralized debt obligations and other structured products including residential mortgage securities, commercial real estate finance and credit derivatives. U.S. structured finance revenue fell 65 percent.

Moody's expects 2008 profit of $1.71 to $1.77 per share excluding one-time items such as this month's purchase of software maker Fermat International. In July, it forecast $1.90 to $2.00 per share. Analysts expected $1.81.

The company also expects full-year revenue to drop by a percentage in the low 20s. In July it projected a mid- to high-teens percentage decline.

McGraw-Hill Cos (MHP.N), which owns Standard & Poor's, the main rival of Moody's Investors Service, posted a 14 percent decline in quarterly profit on Tuesday and lowered its 2008 earnings forecast, but by a smaller percentage.

In afternoon trading, Moody's shares were up 51 cents, or 2.47 percent, at $21.12. They traded as high as $42.42 as recently as Sept. 8, according to Reuters data.

MOODY'S SAYS CRITICS OFF-BASE

Critics, including politicians and regulators, accuse Moody's, S&P and Fimalac SA's (LBCP.PA) Fitch Ratings of failing to be objective in assigning ratings to mortgage and other complex debt. Some believe agencies assigned high ratings to win business from the issuers that pay for the ratings.

Rep. Henry Waxman, chairman of the House of Representatives Oversight and Government Reform Committee, last week termed the rating agencies "a story of colossal failure."

According to documents Waxman distributed, McDaniel told Moody's directors a year ago of a dilemma in how to maintain market share and rating quality, given industry competition.

On Wednesday, McDaniel, like his counterpart Harold "Terry" McGraw at McGraw-Hill, downplayed any risk of conflicts.

"The avoidance of conflicts of interest in this business by moving Moody's to an investor-pays model is a fiction," said McDaniel. "The question really is how do we demonstrate that we are managing potential conflicts properly and transparently."

U.S. and European regulators have proposed reforms such as forcing rating agencies to disclose more about the assumptions they use to rate securities.

Berkshire had a 19.7 percent stake in Moody's as of June 30, according to Thomson ShareWatch. (Editing by Ted Kerr and John Wallace)