RPT-Raters seen unscathed by US financial reform bill

(Repeats to fix typo in headline)

By John Parry

NEW YORK, June 30 (Reuters) - Credit rating agencies have emerged relatively unscathed in the final version of the U.S. financial reform bill, with their business model intact and only minor threats to profits, boosting their near-term prospects, analysts say.

For the big rating agencies -- Moody's Investors Service, Standard & Poor's and Fitch Ratings -- the key feature of the bill, which Congress could finally approve next month, provides some breathing space.

The final bill leaves intact the business model under which debt issuers pay the agencies for ratings -- a structure that had come under criticism for creating a conflict of interest that could cause agencies to dole over rosier ratings than warranted in order to secure business.

The bill does establish a two-year study period that could result in some change to the business model, but not enough to derail the big three's business.

"The study and likely outcome should not have a significant impact" on the agencies, said Haag Sherman, co-founder and managing director of Salient Partners, a Houston-based investment firm.

As the legislation took shape in recent months, financial markets had braced for a swifter and harsher blow to the big raters, analysts reckon.

"We view the prospective impact for the credit rating agencies from the financial reform bill to be relatively modest and therefore a positive" for both Moody's Investors Service and Standard & Poor's, Goldman Sachs analysts wrote in a report this week.

In a reflection of market sentiment, as the final form of the bill was hammered out on Friday, shares in Moody's Corp. (MCO.N) rose by about 6 percent, while shares of Standard & Poor's parent company, McGraw Hill (MHP.N), dipped by about 1.5 percent. Since then, the two companies shares have fallen roughly in line with broad stock market declines.

Goldman said there is, however, a bigger risk of successful lawsuits against rating agencies, which could raise the costs of doing due diligence for ratings and lead to fewer ratings being issued overall.

The bill makes agencies more likely to get sued by investors, if they can prove the raters were "knowingly reckless" with ratings.

However, "these risks are largely embedded in valuation," of the rating agencies' shares, Goldman said.

Credit rating agencies were widely criticized for their role in the 2007-2009 financial crisis for giving overly optimistic ratings on subprime mortgage-backed securities. These securities later imploded, precipitating the credit crisis that nearly toppled Wall Street.

The bill would appoint the Securities and Exchange Commission to execute the two-year study to look for conflicts of interest in the way in which issuers pay for ratings. After the study, a government clearinghouse to assign ratings firms to rate an issuer's debt could be established.

The full costs of reform for the rating agencies business have yet to become clear.

In an ironic twist, Standard & Poor's warned on Tuesday it may cut its ratings on rival Moody's Investors Corp, saying U.S. financial reforms may lower margins and increase litigation costs at credit rating agencies. See [ID:nWNA4559]. (Additional reporting by Karen Brettell and Jennifer Ablan in New York and Kevin Drawbaugh in Washington; Editing by Leslie Adler)