A global credit ratings oligopoly with 40% operating margins — one of only three firms with the government-granted license to rate sovereign and corporate debt worldwide
Chris Hohn
TCI Fund Management
Est. ~9.5% of total portfolio
“Chris Hohn: 'We invest in businesses with the strongest competitive positions — companies where we have high confidence the business will be just as dominant in 10-20 years as it is today.'”
The Business
- Moody's Corporation (MCO) is a global financial intelligence company and one of the Big Three credit rating agencies, alongside S&P Global and Fitch Ratings. Founded in 1909 by John Moody, the company operates through two segments: Moody's Investors Service (credit ratings for sovereign, corporate, and structured finance debt, ~58% of revenue) and Moody's Analytics (risk management software, research, data, and SaaS products, ~42% of revenue).
- Moody's is one of only three Nationally Recognized Statistical Rating Organizations (NRSROs) designated by the SEC — a government-granted oligopoly that guarantees demand as regulatory requirements force debt issuers to obtain ratings. FY2024 revenue was $7.1B (+20%), net income $2.1B (+28%), operating margin 41%, and free cash flow $2.5B (+34%).
- The company operates in 40+ countries with ~16,000 employees. Moody's has compounded at 15%+ annually since its 2000 spinoff from Dun & Bradstreet.
- The ratings business generates near-100% incremental margins on new ratings, while Moody's Analytics provides growing, recurring SaaS revenue that stabilizes earnings through credit cycles.
Why They Own It
“Chris Hohn: 'We invest in businesses with the strongest competitive positions — companies where we have high confidence the business will be just as dominant in 10-20 years as it is today.'”
- Chris Hohn's $6.8B Moody's position (12.7% of TCI) exemplifies his philosophy of owning businesses with the strongest competitive positions in the world. Moody's is one of only three Nationally Recognized Statistical Rating Organizations (NRSROs) — along with S&P Global and Fitch — that rate sovereign and corporate debt globally.
- This is not just a competitive advantage, it is a government-granted oligopoly: regulatory requirements force debt issuers to obtain ratings from at least two NRSROs, effectively guaranteeing demand regardless of economic conditions. The business model is extraordinary: Moody's charges issuers a fee to rate their debt (issuer-pays model), with near-zero marginal costs on each rating.
- Revenue was $7.1B in FY2024 (+20%) with 41% operating margins and $2.5B in free cash flow. The business has two segments: Moody's Investors Service (ratings, ~58% of revenue) and Moody's Analytics (data/analytics/research, ~42%).
- The ratings business is the crown jewel — a natural oligopoly with 95%+ incremental margins on new ratings. Moody's Analytics provides a growing, recurring SaaS revenue stream that diversifies and stabilizes earnings.
- Hohn values the structural permanence of this business: as long as debt capital markets exist, issuers will need credit ratings from Moody's.
What the investor sees
At $6.8B and 12.7% of TCI's portfolio, Moody's is Hohn's fourth-largest position. MCO trades at approximately 38-40x trailing EPS of $11.26, which is a premium multiple. But Hohn's framework prioritizes business quality over cheapness. The math: (1) 10-12% revenue growth (credit issuance recovery + Analytics SaaS growth), (2) continued margin expansion toward 45%+ as analytics scales, (3) 1-2% buyback yield, and (4) ~1% dividend yield. Total return: 12% revenue growth + 2% margin expansion + 1.5% buyback + 1% dividend = 16-17% annual return. Moody's has compounded at 15%+ annually for over 25 years since its spinoff from Dun & Bradstreet in 2000. At Hohn's typical 10-20 year holding period, the premium multiple is easily justified by the business durability.
Financial Snapshot
7088
revenue FY2024 millions
2058
net income FY2024 millions
11.26
eps FY2024
40.6
operating margin pct
2521
free cash flow millions
19.8
revenue growth pct
~16,000
employees
28.1
net income growth pct
The Moat
- Government-granted oligopoly — one of only 3 NRSROs (Moody's, S&P, Fitch). Regulatory requirements force issuers to obtain ratings, guaranteeing demand
- Issuer-pays model with near-zero marginal costs — each additional rating costs almost nothing to produce, creating 90%+ incremental margins
- Regulatory embeddedness — Basel capital requirements, investment mandates, and bond covenants reference credit ratings, making them structurally required
- Network effects in ratings — a rating's value increases as more investors use it, creating a self-reinforcing standard
- Moody's Analytics SaaS platform — growing recurring revenue stream with high switching costs in risk management software
- 125+ years of credit data history — impossible to replicate, providing unmatched analytical depth
- Global coverage — 40+ countries, making Moody's essential for cross-border capital markets
What Could Go Wrong
Regulatory risk — credit rating agencies faced scrutiny after the 2008 financial crisis. New regulations could change the issuer-pays model or increase competition
Credit cycle dependency — ratings revenue is correlated with debt issuance volumes, which decline during credit crunches and recessions
Potential disruption from AI-driven credit analysis — automated credit assessment could reduce reliance on traditional ratings agencies over time
Premium valuation (38x+ earnings) provides minimal margin of safety if growth slows
Reputational risk from rating failures — if a highly-rated issuer defaults unexpectedly, it could damage Moody's credibility and invite regulatory action
Competition from S&P Global — S&P Global is larger and more diversified, potentially gaining share in analytics
Catalysts
- Credit issuance recovery — as interest rate volatility normalizes, corporate refinancing and new issuance drives ratings revenue growth
- Moody's Analytics growth — SaaS subscription model growing 10-15% organically with expanding margins, providing earnings stability
- AI integration — Moody's integrating AI/LLM capabilities into its analytics platform, creating new products and efficiency gains
- Margin expansion — operating margins expanding from 36% to 41% in one year, with room for further improvement as analytics scales
- Share buyback program — Moody's returns significant capital through buybacks, reducing share count annually
- Emerging market debt issuance — growing capital markets in developing economies require credit ratings, expanding the addressable market
In Their Own Words
“Chris Hohn: 'Moody's is one of the most durable businesses in the world — as long as companies issue debt, they need a credit rating. The regulatory requirement makes this effectively a government-granted franchise.'”
“Chris Hohn: 'We look for businesses with structural growth, high barriers to entry, and pricing power. The credit ratings oligopoly checks every box.'”
“Chris Hohn: 'TCI focuses on a small number of exceptional businesses. Our portfolio of 9 stocks reflects our belief that concentration in the very best companies produces superior long-term returns.'”
“Chris Hohn (TCI Fund): TCI has generated approximately 18-20% CAGR since 2003 through concentrated ownership of monopoly-quality businesses.”