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Nicole Benjamin: Hello, everyone. It’s Nicole Benjamin, your host here at Seeking Alpha to bring you another episode of Portfolio Pulse, where, as the name suggests, we keep up with all the big financial moves happening in the market. Now, in today’s episode, we’re going to dive deep into all things MCO and SPGI. And to join us and help us do that today, I have Luca Socci. So Luca, thank you very much for joining us today.
Luca Socci: Oh, thank you for inviting me and taking me. It is a joy and honor.
NB: Yes. Definitely. So, I see you’ve been in Seeking Alpha since 2022. So, tell us more about your financial background, your investment philosophy. What got you on the platform in the first place?
LS: I started my Alpha Quest a little before 2022. That’s when I became an analyst, but before I was an analyst, I was actually an investor, a retail investor. And I actually became more focused on investing when I got married and had kids because I started thinking about how I could build wealth with them. So, I started investing because I want to leave something for them when they need it.
NB: Now, I want to jump in. You recently wrote an article about MCO and SPGI. And in your article, you talk about how Moody’s is safe from AI because its models are required by law. So, with that in mind and Moody’s 97% retention on AI, do you think these AI fears are overblown?
LS: A lot, yes. The real fear, the real threat of AI that investors think could affect Moody’s and S&P Global data sales. That means if you use LLM today, you will see that compared to a few years ago, it is much better at extracting data from raw PDF files. Okay, so, investors are thinking, why do I need to pay S&P Global or Moody’s investment platforms to get data that I can easily pull with my new self-build proxy? And that’s partly true, okay, but that doesn’t understand what Moody’s and S&P Global are doing, okay, because the most important thing is not just pulling data, we agree that this is something that AI will do for us, but what we need when we invest is that we need validated data.
We need someone who takes the case that, okay, that number is right or wrong. We need someone to be accountable to and that can’t be AI, it has to be real where people are a part of it. So, that means companies. At Moody’s and S&P Global again, they offer this. They provide verified data.
NB: You also talk about how these companies are counting on the debt wall to be refinanced in 2026. So, with that in mind, is this single digit growth, in these interest rates, like a sure thing? Do you think?
LS: Nothing is certain in the world of investing as we see every day. So, there are two important things here. A wall of debt is certain. I mean companies need, companies borrowed cheap money in 2020 and 2021. This is true. They did that. That’s right. Additionally, private debt is growing and private debt has a shorter life cycle, so it needs to be refinanced in a few years, compared to public debt.
So, this is a short story, we have a lot of debt, cheap debt left, coming in 2026 and 2027, but 2026 is a big wall. So, the real question is, whether companies will refinance it or not, but most of them need to refinance themselves because they don’t have the money to pay it. They need that money, they need it in their life cycle.
So, not really, so the thing comes when companies will decide to do this. And so far, the biggest difference could be the Fed’s new share policy. If the interest rate will decrease, perhaps, some companies may decide to postpone their issuance of capital and debt issuance in the second half of the year instead of the first half of the year. So, that’s a big change. But the reality is that the big wall of debt maturities is coming in 2026, and this is a big deal for both companies.
NB: Now, Luca, I want to ask, S&P Global has its Mobility spin-off. So, as that becomes a highly profitable company, and investors consider this for their portfolios, is this separation, so to speak, really profitable or is that a sign that growth is really slowing down?
LS: That’s actually what makes me more bullish on Moody’s right now than S&P Global, because S&P Global has to deal with a spin-off, which is really unclear on a few variables. For example, we still don’t know the distribution ratio. So, we know that S&P Global will separate the Mobility division into a separate company and issue some shares to existing shareholders, but we do not know the ratio between the existing shares of S&P Global as they are now and the spin-off.
So, that’s an important thing. But again, I think a lot of investors are afraid of this breakout because they will end up with shares of the new S&P Global and the old Mobility company and the Mobility company, which is connected to the world of cars, the car data business, so to speak. Investors fear that it will be given lower multiples, compared to the rest of the S&P Global as it is now.
NB: So, Moody’s aims for a profit of 53%, which is really big compared to other industries. So, I think with that in mind, he said, he has strength in it. Is this – what is their business model that allows them to get 50% of every dollar they make?
LS: Oh, there are three things. Low marginal cost, almost no competition on price, and compulsory demand. When you measure credit, the only costs you have are very small, the team of analysts, the proprietary model you have developed and your reputation that you have built up over a hundred years. Therefore, the cost of repeatedly issuing debt is much lower and lower every time you do so, because there is a lower marginal cost. There is also no price competition because basically Moody’s and S&P Global and Fitch are an oligopoly in credit rating and mandatory demand.
That means, companies should limit their debt if they want to pay the lowest interest on that debt. If they don’t get a credit rating, they will pay high interest. Therefore, it is to their advantage that their credit is limited. And this is what makes Moody’s business so unique.
NB: That’s right. Well, we’ll leave it at that. Thank you very much, Luca, for joining us today. And to everyone listening, go ahead, click the follow button on Luca’s page. Go look at Moody’s. See if the S&P Global would be a good fit for your portfolio. And we’ll see you here next time in another episode.
Follow Luca Socci in search of Alpha!
Read Luca Socci’s article on Seeking Alpha!
